Well, this is the final blog for ‘news from the barn’ before Rachel Reeves’ much-anticipated Autumn Budget next Wednesday (26th November).
It’s been a topsy-turvy ride over the past few weeks (and months) of rumours and U-turns, but we’re now only a few days away from finding out ‘the truth’ – and, indeed, our fate!
I wanted to pick up today on one piece of speculation that, if true, certainly has the potential to hit employees who ‘give up’ or ‘sacrifice’ part of their salary and, instead, accept your offer (as employer) to make pension contributions on their behalf.
The rumour is about capping national insurance (NI) relief on salary-sacrifice pension contributions. The reason that salary sacrifice for pension contributions is beneficial is that there is currently no NI for either the employer (15%) or the employee (8%) to pay when an employer makes a pension contribution for the employee. There is, of course, both employer’s and employee’s NI to pay on salary. So, taking a salary cut and replacing the amount sacrificed with employer-funded pension contributions makes complete sense.
The thinking is that the chancellor will cap the amount of pension contributions that can be made by the employer, on behalf of the employee, free of NI, to £2,000 per annum. There is currently no cap. However, there is a parallel stream of commentary floating the idea of NI on employer pension contributions generally, as it would raise a huge amount for the Treasury.
If the chancellor only caps NI relief on salary sacrifice, then a typical director taking £12,570 salary and £37,700 of dividends but getting their company (employer) to make significant annual pension contributions for them in order, partly, to reduce the company’s corporation tax liability, is probably outside the main firing line.
If, however, the chancellor instead (or later) moves to NI on all employer contributions, then those director contributions would almost certainly be caught.
What’s actually being rumoured?
The main “headline” rumour – cap NI relief on salary sacrifice
Recent press and industry commentary are converging on a fairly consistent story; at the moment, salary-sacrifice pension contributions are exempt from NI for both employer and employee and can be used up to the £60k annual allowance.
Reports suggest that the Treasury is looking at a £2,000 per year cap on the earnings that can be exchanged for pension via salary sacrifice without NI. Above that, normal employee and employer NI would apply (8% and 2% for employees depending on band; 15% employer NIC). HMRC’s own research and consultation materials modelled exactly this type of £2,000 cap and tested employer reactions.
According to Money Week and A J Bell, the Treasury is reportedly eyeing this as a £2bn a year revenue raiser, by clawing back part of the (roughly £4bn) NI cost of salary-sacrifice pension schemes.
Wider options that have been floated
Alongside the above, various think-tanks, ex-ministers and firms have talked about broader options. The Institute for Fiscal Studies and others have repeatedly suggested levying NI on employer pension contributions more generally as a way to raise tens of billions, noting that NI relief on employer contributions is “generous and poorly targeted”. Former pensions minister, Sir Steve Webb, has said that an NI charge on employer pension contributions is one of the most likely ways a chancellor could raise billions (estimates around £15–17bn at full employer NIC rates according to The Times).
Some commentary explicitly lists options like:
Applying NI to all employer pension contributions
Capping the NI exemption (e.g. first £2,000 per annum only – similar to the current salary-sacrifice rumour)
Or, in the extreme, abolishing salary-sacrifice altogether
But for this upcoming Budget, most mainstream press coverage (including The Guardian, The Financial Times and Money Week) is now framed around a targeted cap on salary-sacrifice NI relief, rather than an immediate blanket NI charge on all employer contributions.
The typical SME director-shareholder pattern
Company directors often get their companies to put in a large contribution to their pensions, possibly up to the annual cap of £60,000. A company doing this saves £15,000 in corporation tax (assuming a 25% corporation tax rate). There’s no NI and no personal income tax impact for the director. So, the total saving is £15,000 (for the company).
What would it look like if a blanket NI charge was introduced?
Well, the company would pay 15% employer’s NI on the £60,000 pension contribution – that’s £9,000. The director would pay employee’s NI (some would be at 8% and some at 2%, so let’s just assume an average of 5%). That’s another £3,000.
The company would get its 25% corporation tax relief on both the £60,000 and the £9,000 employer’s NI cost – so 25% x £69,000 = £17,250.
In summary, the company saves £17,250 in corporation tax, but the total NI paid (between the company and the director, combined) is £12,000.
The net saving then is just £17,250 minus £12,000 = £5,250. Put another way, the net saving is just 8.75% of the £60,000 pension contribution – rather than 25% as it currently stands.
Would the salary-sacrifice changes impact typical SME directors?
For most director-shareholders taking a £12,570 salary, those employer contributions are not structured as a formal salary-sacrifice arrangement; they’re simply pension contributions on top of a low director salary. Therefore, an employer contribution paid for a director without any salary-sacrifice agreement (i.e. no contractual reduction in pay) would sit outside the new salary-sacrifice cap.
In this scenario, your standard SME director with £12,570 salary, dividends up to the basic rate limit and a chunky employer contribution funded directly by the company would not be directly affected by the change, because their contribution isn’t “sacrificed salary” – it’s just an employer pension contribution.
That’s broadly consistent with how the rumoured cap is being modelled by HMRC and discussed in the press – it’s being sold as a clampdown on NI arbitrage via salary sacrifice, not as a wholesale rewrite of how employer pension contributions are treated.
So – what’s “thought likely” right now?
According to both The Financial Times and The Guardian, the ‘most likely’ outcome is a targeted cap on NI-free salary-sacrifice pension contributions, probably around £2,000 of sacrificed pay per year, catching higher earners and richer sacrifice arrangements but leaving ordinary auto-enrolment and modest sacrifice largely intact.
In this “salary-sacrifice-only” design, your low-salary, dividend-heavy directors using straightforward employer contributions are not the primary target and would likely be unaffected.
Are you planning employer contributions?
To end with, are you thinking about getting your company to put money into your pension for you in your company’s current financial year – and benefit from the corporation tax savings?
If so, my recommendation would be to do this now, if at all possible, before the Budget.
Although, as described above, the likelihood is that the chancellor will only apply NI to pension contributions made under salary-sacrifice arrangements, you never know! And, whilst any changes may only apply from 6th April 2026, there is a possibility that they could be implemented with immediate effect.