The 2024 UK budget introduced significant changes that will affect how employers and employees approach pension contributions. With higher costs for employers and new tax rules on inherited pensions, both sides need to understand the impact on their finances and retirement planning. In this article, we will break down the UK Budget 2024 pension changes and their implications for employers and employees alike.
Key Pension Changes in the UK Budget 2024
The budget introduced two major updates for pensions that affect contribution costs and inheritance taxes. Understanding these changes is crucial for both employers and employees as they plan their future finances.
1. Increase in Employer National Insurance Contributions (NICs)
- NICs for employers have risen from 13.8% to 15%, and the threshold for these contributions has been lowered from £9,100 to £5,000.
- This higher cost may affect employers’ ability to contribute additional funds to employee pensions.
2. Inheritance Tax (IHT) on Pensions, Effective 2027
- Starting in 2027, pensions will fall under IHT, meaning they’ll be taxed as part of an estate over £325,000.
- This could increase tax burdens on inherited pensions, affecting estate planning strategies.
How Pension Contribution Changes Impact Employers
The budget’s increased NIC rate directly impacts employer contribution costs, leading many to consider adjustments in budget planning and benefits.
Higher Contribution Costs
With the NIC rate now at 15%, employers will face higher payroll costs, especially for employees earning more than £5,000 annually. This added expense could limit how much companies can contribute to employees’ pensions beyond the auto-enrollment minimum.
Budget Adjustments
Although pension tax relief itself hasn’t changed, the higher NIC costs may mean employers have to reconsider their overall budgets. They may need to adjust benefits or look for cost-saving strategies to manage these new expenses while still supporting employees’ retirement goals.
Planning Considerations
Employers may want to explore cost-effective ways to offer benefits, such as salary sacrifice schemes. These adjustments could help manage NIC costs while still providing employees with valuable pension contributions.
Strategic Tax and Pension Planning
How Pension Contribution Changes Impact Employees
The budget changes may also influence employee benefits, pension growth, and estate planning.
Effect on Employer Contributions
Since employers now face higher costs due to NIC changes, they may reduce extra pension contributions. This could affect employees’ long-term pension savings, as employer contributions are a big part of building retirement funds.
Inheritance Tax on Pensions
Starting in 2027, pensions will be taxed as part of the estate under IHT rules. Employees might need to rethink how they pass on pension savings, possibly by spending down pensions or gifting assets earlier to reduce tax burdens on beneficiaries.
Long-Term Pension Growth
These budget changes could impact employees’ retirement savings over time, especially if employer contributions decrease. Employees should consider consulting financial advisors to maximise their pension growth under the new rules.
Strategies for Maximising Pension Benefits
Both employers and employees can make the most of the new pension rules by consulting with financial advisors. Employers may explore salary sacrifice schemes to manage increased NIC costs while still supporting pension contributions. Meanwhile, employees can use pension calculators to estimate future savings and assess tax impacts. Working with advisors, they can also adjust estate plans to prepare for IHT on pensions, ensuring their retirement savings remain secure.
Conclusion
The 2024 UK budget brings significant changes to pensions, especially with higher NICs for employers and IHT on pensions from 2027. Employers and employees should stay informed and adjust their financial strategies to maintain stable and effective retirement savings. If you need help understanding these changes and improving your retirement savings, book a free consultation with us. Our experts are ready to assist you in securing your financial future.
Frequently Asked Questions
Inheritance Tax (IHT) is applied to the value of a person’s estate, including money, property, and possessions, after they pass away. Starting in April 2027, pensions will be included in the estate for IHT purposes if the total estate exceeds £325,000. As a result, unused pension funds and death benefits may be subject to IHT, increasing the tax burden on beneficiaries.
Yes, there are strategies to reduce IHT on pension savings. One option is to draw down from your pension during your lifetime, which lowers the amount that could be taxed upon your death. Another approach is lifetime gifting, where you transfer assets to beneficiaries while you’re still alive, reducing the taxable estate.
Salary sacrifice schemes let employees give up part of their pre-tax salary in exchange for benefits like pension contributions. This lowers their gross salary, reducing the National Insurance Contributions (NICs) that employers and employees have to pay. For employers, this helps manage the higher NIC rates introduced in the 2024 UK Budget, cutting payroll costs while still supporting pensions.
Yes, you can carry forward unused pension allowances from the previous three tax years, which allows you to contribute more than the current annual limit (£60,000 for the 2024/2025 tax year) without paying extra tax.
If you have no income, you can still make an annual pension contribution of up to £3,600 gross. You would pay £2,880, and the government adds £720 in tax relief. This rule allows non-earners, such as children or non-working spouses, to grow their pension savings. Contributions above this limit won’t qualify for tax relief if you don’t have relevant earnings.
