{"id":45048,"date":"2025-11-14T05:32:55","date_gmt":"2025-11-14T05:32:55","guid":{"rendered":"https:\/\/employmenthero.com\/uk\/?post_type=news&p=45048"},"modified":"2026-02-03T09:57:09","modified_gmt":"2026-02-03T09:57:09","slug":"pension-salary-sacrifice-cap-small-business-impact","status":"publish","type":"news","link":"https:\/\/employmenthero.com\/uk\/news\/pension-salary-sacrifice-cap-small-business-impact\/","title":{"rendered":"The Pension Tax Tweak That Could Cost Small Businesses More"},"content":{"rendered":"\n
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The Government is weighing up a cap on one of the few tax breaks still widely used by employers and workers alike: the salary sacrifice scheme. <\/strong><\/p>\n\n\n\n

At first glance, it looks like a clever way to raise \u00a32 billion for the Treasury. But businesses and pension experts warn the policy could backfire badly, cutting into wages, pension savings and even jobs.<\/p>\n\n\n\n

Here\u2019s what\u2019s at stake and why it matters for small businesses in particular.<\/p>\n\n\n\n

What\u2019s Changing<\/h2>\n\n\n\n

Under salary sacrifice, an employee agrees to give up part of their salary in return for a benefit, such as pension contributions. Because that money isn\u2019t classed as salary, both the employer and employee save on National Insurance (NI). Employees boost their pensions while employers stretch their budgets a bit further.<\/p>\n\n\n\n

Now, the Government is reportedly considering capping the amount that can go into pension salary sacrifice without NI being charged at \u00a32,000 a year. Anything above that would attract the standard NI rates: 15% for employers and 8% for employees on salaries less than \u00a350,270, or 2% on income beyond that. <\/p>\n\n\n\n

Who Benefits<\/h2>\n\n\n\n

From the Treasury\u2019s point of view, this looks like a quick win. HMRC estimates that salary sacrifice costs the Government \u00a34.1 billion a year in lost NI \u2013 \u00a31.2 billion from employees and \u00a32.9 billion from employers.<\/p>\n\n\n\n

By capping the relief, the Government expects to raise about \u00a32 billion. That\u2019s money it could use to plug public spending gaps or fund other priorities.<\/p>\n\n\n\n

Who Loses<\/h2>\n\n\n\n

That\u2019s where small businesses come in. Pension experts warn that many employers could respond to the change by cutting back pension contributions to offset the higher NI costs \u2013 a worrying prospect given that four in 10 people are currently undersaving for retirement<\/a>.<\/p>\n\n\n\n

A business representative who spoke to the Financial Times<\/em> on condition of anonymity was more blunt: \u201cEssentially what we are talking about is another increase in national insurance\u2009.\u2009.\u2009.\u2009This could lead to companies lowering headcounts and investing less.\u201d<\/p>\n\n\n\n

For a worker on around \u00a345,000 who puts 5% of their pay into a pension, the change would mean only a few dozen pounds more in National Insurance each year, with a similar rise in costs for their employer, based on estimates from accounting firm RSM.<\/p>\n\n\n\n

Those numbers sound small until you multiply them across a workforce. For a 20-person business, that could mean several thousand pounds in extra costs every year. And for higher earners or more generous pension schemes, the hit could be far larger.<\/p>\n\n\n\n

Why Small Businesses Should Care<\/strong><\/h3>\n\n\n\n

Most small employers don\u2019t have the deep pockets of the public sector, where average employer pension contributions are around 18%, compared with 6% in the private sector.<\/p>\n\n\n\n

If tax relief shrinks, businesses will likely struggle to keep competitive pension packages \u2013 just as they\u2019re trying to attract and keep staff in a tight labour market.<\/p>\n\n\n\n

In response to news about rising unemployment<\/a> \u2013 an issue that some experts fear will worsen with policies like these, Tina McKenzie, policy chair for the Federation of Small Businesses said: <\/p>\n\n\n\n

\u201cPushing small businesses out of employing staff with ever increasing regulation, litigation and tax will scar present and future generations who will keep finding the search for work incredibly painful. <\/p>\n\n\n\n

\u201cWe need a government that sides with the private sector \u2013 including people starting out on their own \u2013 not one that sides against it.<\/p>\n\n\n\n

Salary sacrifice might sound like a technical detail, but for a number of small businesses, it\u2019s a vital part of the pay and benefits puzzle. Limiting it could mean higher costs today and smaller savings tomorrow, for both employers and their teams.<\/p>\n\n\n\n

In the rush to raise short-term revenue, the Government risks weakening the long-term foundations of small business growth and retirement security alike.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

A proposed pension salary sacrifice cap could raise costs for SMEs and reduce benefits for staff. Learn what the NI changes may mean for small employers.<\/p>\n","protected":false},"author":10,"featured_media":45058,"template":"","meta":{"inline_featured_image":false,"_visual_mode":"business","exclude_from_algolia":false,"author_id":70413,"reading_time":"3 min read","display_reading_time":false,"homepage_thumbnail":0},"categories":[277],"tags":[],"learn_topic":[],"audience":[],"post_features":[],"class_list":["post-45048","news","type-news","status-publish","has-post-thumbnail","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/news\/45048","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/news"}],"about":[{"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/types\/news"}],"author":[{"embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/users\/10"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/media\/45058"}],"wp:attachment":[{"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/media?parent=45048"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/categories?post=45048"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/tags?post=45048"},{"taxonomy":"learn_topic","embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/learn_topic?post=45048"},{"taxonomy":"audience","embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/audience?post=45048"},{"taxonomy":"post_features","embeddable":true,"href":"https:\/\/employmenthero.com\/uk\/wp-json\/wp\/v2\/post_features?post=45048"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}