The Chancellor has consistently communicated that there is a ‘fiscal blackhole’ that the Government needs to address in the UK finances, and rumours about how this will be tackled in the Autumn Budget have been mounting in recent weeks. Whilst speculation that Income Tax rates would be increased appear to have fizzled out (which if introduced would have been contrary to a key manifesto pledge of maintaining existing rates), it seems the Government is considering whether revenue could be raised via other changes to some established salary sacrifice arrangements.
It’s unlikely that these amendments generate the same scale of revenue that a flat Income Tax rate would, but the impact on employers and employees may be no less challenging to navigate and some of the key points are explored below.
Pensions
The Government is reportedly planning to cap the amount of salary-sacrifice pension contributions exempt from National Insurance at £2,000 per annum. Under the rumoured changes, contributions above that threshold would become subject to employee and employer NI.
Whilst various changes to pension relief have been mooted for a number of years but not materialised, persistent stories ahead of this Budget seem like a stronger indication that change may well finally be coming. It’s expected that the policy could raise an estimated £2 billion annually. However, there are legitimate concerns being voiced by industry about the increased cost to employers (coming quickly after an increase in the NIC rate from April 2025), and the potential negative impact on how much employees seek to save personally into their private pensions at a time when the State already faces an increasing welfare budget burden.
Implications for employers/individuals
- Employers with existing salary-sacrifice arrangements should assess what the potential cost impact would be if these changes came into effect (i.e. 15% NIC on contributions over £2,000 per individual)
- We would expect guidance from HMRC to be necessary on how the additional NIC would be calculated via the payroll, but clients should be mindful that changes to current processes/payroll set-ups may be required imminently
- Employees making significant pension contributions via salary-sacrifice should evaluate the net benefit if NIC relief is restricted (the additional cost would be 8% for employees paying NIC at lower earnings rates, and 2% for higher earners)
- As with any material changes to employment tax legislation that impact employee net pay, clear communications with staff will be essential where salary sacrifice schemes are in place.
Electric Vehicles
There have been significant reports that the Budget may include a new levy on Electric Vehicles (EVs), with speculation focussing on a charge of around 3p per mile. It seems that implementation would potentially be delayed until 2028 following consultation, and at the time of writing this article, there is no clear method set out on how the charge would be managed or policed.
The underlying rationale behind the move is that as fuel duty revenues fall with the uptake of EVs (and therefore reduction in traditional petrol / diesel vehicles), the Government is seeking to replace the loss of revenue with an alternative road-use taxation. As an example, based on typical annual mileage of c.9,000 miles, the additional cost would be c£270 per vehicle per year.
There has been and continues to be, significant pushback from the car manufacturing industry as well as from an environmental perspective, as this would likely be seen as a potential deterrent for further uptake of EVs. Coupled with previous speculation earlier in the year that the Treasury might restrict tax breaks for EV salary sacrifice, (arguing they disproportionately benefit higher earners), it’s clear that there may yet be a bumpy road ahead for the public’s transition from traditional petrol / diesel vehicles.
Implications for employers/individuals
- Employers running company EV fleets should factor this potential future cost into the total cost of ownership modelling
- Employees with EVs (either personally or via company salary-sacrifice schemes) will likely want to review the impact of this and future tax changes on their personal income position
- Although changes aren’t likely to be immediate, planning may mitigate surprise cost increases.
Cycle to work schemes
Finally, it seems likely that the Government will make some changes to the ‘Cycle to Work’ scheme, which allows employees to sacrifice salary in return for a bicycle they use for commuting to their place of work.
Government sources are reported to be considering reimposing a maximum limit on the value of bikes purchased through the scheme, reversing the 2019 decision that removed a £1,000 maximum value. Details haven’t been confirmed, but speculation suggests a threshold ranging between £1,000 and possibly £3,000–£4,000 to restrict some of the most expensive bikes on the market being purchased, and refocus the scheme on individuals who genuinely use their bike for commuting rather than other personal reasons.
It’s unclear whether the cap would be a cliff edge limit, or whether it would be a maximum contribution to a bike regardless of overall cost. Our expectation would be the former, but we wait to see the final approach.
Implications for employers/individuals
- Cycle to work schemes have been a common benefit amongst employers for a number of years now, and so changes to the scheme would need to be communicated to employers appropriately. Typically, employers outsource administration of such schemes to third parties, and so we’d expect that these companies would provide guidance
- A risk that currently exists with cycle to work schemes is how the value of any bike transferred to the employee at the end of the initial lease period is calculated. In some cases, a residual cost should be valued and reported as a taxable benefit. This risk should in theory reduce if there is a cap introduced, as the value of bikes being sacrificed under the scheme will drop
- Monthly salary sacrifice amounts for the most expensive bikes can be quite high, and give employers headaches from a National Minimum Wage perspective (as NMW limits cannot be breached as a result of salary sacrifice reductions). In theory, the proposed cap should mitigate this risk somewhat as monthly contributions will have a maximum (rather than uncapped) level.
Summary & next steps
With Budget 2025 fast approaching, we will soon find out if these measures are introduced. However, to the extent possible, employers can be looking ahead and considering early scenario planning if the impacts on them could be significant.
If you have any questions about the potential impact of the potential changes, please contact Liam Condron.
