Key budget takeaways: Pension sponsors
For sponsoring employers, the new budget presents increased employment costs and a number of tax changes to work through. There are, however, opportunities - the overall impact of the budget is to make pension provision more tax efficient for employers relative to salary or other benefits. Reviewing existing approaches and supporting employees will be key for sponsors.
The UK autumn budget introduced significant tax changes, including higher National Insurance contributions and taxes that could reshape benefits strategies.
Employers must adapt to optimise their offerings, support employees, and manage costs effectively. Here is a closer look at the budget’s implications with a focus on the pensions aspects.
Higher employment costs
Increased employer National Insurance contributions – both the increase from 13.8% to 15.0% and the reduction in the salary threshold from £9,100 to £5,000 – have clear implications for employers. Coupled with the raises to the National Living Wage and National Minimum Wage, employers can expect significantly higher employment costs, although reviewing or introducing salary sacrifice arrangements, as described below, could help to offset some of the increase.
From a pension perspective, the increases to the National Living Wage and National Minimum Wage will mean an increased cost of employer contributions for many. In turn, this could affect employers’ ability to enhance pension contributions beyond the 3% minimum required under auto-enrolment, and could see some consider reducing current levels.
Now, more than ever, sponsors should review their overall benefit provision to ensure they, and their employees, are getting the most for their money.
Salary sacrifice untouched
Salary sacrifice can benefit both sponsors and members of pension schemes by reducing National Insurance liabilities, and its operation remained untouched by the budget.
For schemes already implementing salary sacrifice for pension contributions, it will be worth checking the details of the arrangement. Legacy arrangements may be nuanced and include opt-in features, or apply only to particular groups of employees, therefore not maximising the potential benefits. For those not already using salary sacrifice, the rising employer costs previously mentioned could be the trigger to revisit that decision.
Nick McMenemy, Digital Strategy & Markets Leader at Mercer Marsh Benefits says. “In the 20 years I’ve watched budgets, I’ve expected salary sacrifice to be hit, and it hasn’t yet. There’s a tax benefit for you as the employer, and also for your employees.
“Channelling more employees into a salary sacrifice model, not just for their pension but for wider-ranging benefits, is particularly important as employers look to manage the broader financial impacts of higher employment costs on their pension scheme and bottom line.”
More pension reform to come
While this budget was relatively light in terms of pension reform, sponsors can expect more changes to come in this area. Tess Page, Mercer’s Wealth Strategy Leader, points to the current pensions review, which is expected to explore reforms relating to consolidation, UK investment, and retirement adequacy.
“The pensions review will be cover a number of areas of reform. Appropriately, these matters will be progressed by the Government as part of the outcome of that review, rather than in the budget,” Page says.
The call for evidence in phase one of the Government’s pensions review, which addresses consolidation and investment matters, focused on defined contribution schemes and local government pension schemes, has closed. The second phase, covering adequacy, is expected to begin shortly.
By leveraging tax-efficient strategies such as salary sacrifice and exploring areas for savings, pension scheme sponsors can ensure their schemes remain competitive and supportive of employee retirement outcomes, even as employment costs rise.