The reduction in employee National Insurance contributions announced in the March 2024 budget makes pension salary sacrifice schemes less attractive for employees – and this could have a knock-on effect on employers operating these schemes. 

The budget's move to lower these contributions effectively increases the take-home pay of employees across various income brackets. While this adjustment aims to stimulate consumer spending and economic growth, its implications for pension salary sacrifice arrangements are noteworthy.

With the reduction in National Insurance contributions, employees’ take-home pay will have increased. This could potentially diminish the attractiveness of pension salary sacrifice schemes, as the tax savings they offer are comparatively smaller. Where employees pay more than the minimum contributions, they may opt to retain more of their take-home pay by reducing their additional contributions rather than redirecting it towards their pension scheme. Alternatively, they might opt out of the pension scheme entirely.

This would also impact employers, as they too save on employers’ National Insurance contributions when an employee's salary sacrifices their pension contributions. There was no cut in the rate of employer’s National Insurance, so if employees choose not to salary sacrifice, employers will pay more National Insurance.

There may be more change to come on this front with Jeremy Hunt raising the possibility of abolishing National Insurance altogether or merging it with income tax. This would be a seismic shift and would effectively make pension salary sacrifice schemes redundant.

With a general election looming, it may well be that this idea gets well and truly kicked into the long grass – particularly if there is a change in government.