Salary sacrifice pensions: How do these changes affect me?

When running a law firm, it is important when attracting and retaining talented solicitors and support staff to offer more than just a competitive salary.

In the past an excellent way of doing this was to offer practical solutions such as salary sacrifice for pensions where staff could exchange a portion of their gross salary for a valuable benefit, such as a pension.

However, since the changes to salary sacrifice have been announced for 2029, this may no longer be best practice.

What are the changes to salary sacrifice pensions?

From April 2029, the Government plans to introduce a £2,000 cap on the amount you can contribute to a workplace pension by salary sacrifice that remains exempt from National Insurance (NI) contributions.

At the moment these contributions are exempt from Income Tax and NI making them highly tax-efficient, however, new rules will put a limit on these savings.

Anything above £2,000 will still be exempt from Income Tax relief but employers and employees will be subject to NI contributions.

While this may no longer be tax efficient, you can still pay into your pension pot by salary sacrifice.

How will this affect law firms?

Law firms often need to offer employees competitive benefits to retain staff and attract new solicitors, with the impending ramifications of salary sacrifice to pensions this removes a vital perk.

At the moment when an employee sacrifices part of their gross salary the employers NI contributions is calculated on the reduced salary meaning employers pay less NI contributions for participating employees.

However, when the changes come into effect any amount over the £2,000 cap will need to have employers pay NI at a rate of 15 per cent.

It is important to review current structures to mitigate against this charge, but withdrawing the perk entirely will reduce your benefits package and make roles less competitive.

How will this affect lawyers?

The average salary for a lawyer in the UK is between £40,000 and £55,000 often placing lawyers in the Higher Rate tax band, so salary sacrificing £5,000 a year for earners over £50,271 is a tax efficient plan.

When the changes come into effect however this may no longer be the most tax efficient plan.

Employees contributing more than £2,000 annually through salary sacrifice will see reduced NI savings and also may see a dip in their take home pay compared to what the current system offers.

Contributions will still see Income Tax relief and adjusted net income to avoid higher tax rate thresholds.

How we can help you

Salary sacrifice has long been a tax efficient plan for employees and employers to manage NI contributions.

Our team are here to help employers plan accordingly for the changes and assess if the current pension schemes remain effective.

Keep rewarding your staff financially by mitigating against a massive tax bill.

Get in touch today for advice on mitigating against the changes to salary sacrifice.