In the United Kingdom, government budget decisions significantly influence employee benefits, largely due to the country’s reliance on the National Health Service (NHS) and a state pension system that contributes substantially to workers’ retirement income.
On October 30, 2024, Chancellor Rachel Reeves presented the Autumn Budget, marking the first budget from the Labour government following their election victory earlier in the year.
According to insights from Howden Employee Benefits & Wellbeing, a UK partner for Asinta, the budget contained minimal direct changes to employee benefits. Here’s a summary of the key updates and their potential implications for businesses:
Pensions and Death Benefits.
An announcement under review may affect death benefits. Howden notes that the likely impact is restricted to death benefits funded through accrued pension schemes, rather than those provided through Group Life Assurance Schemes, being considered for Inheritance Tax (IHT) purposes. Further clarification is expected, and updates will be provided as details emerge.
Health Benefits.
The budget did not introduce any significant changes affecting health benefits. Speculation about a potential increase in the Insurance Premium Tax (IPT) proved unfounded, as no adjustments were made.
Employer National Insurance Contributions (NICs).
Starting in April 2025, Employers’ NICs will increase from 13.8% to 15%. These contributions, which employers are required to pay in addition to their employees’ salaries, represent a rising cost for businesses.
Perspectives on Key Budget Implications .
Salary Sacrifice.
Employers facing rising Employer NICs and tax liabilities can mitigate these costs through Salary Sacrifice. By adopting this approach, businesses could save 15% on Employer NICs related to employees’ pension contributions. This strategy not only helps manage additional expenses but also enhances employees’ retirement outcomes.
With changes to auto-enrolment thresholds and the elimination of the lower limit on the horizon, now is an opportune moment for employers to reassess pension contributions and overall remuneration strategies. For more insights into the advantages of Salary Sacrifice, employers can access Howden’s comprehensive report on the subject.
Importance of Communication.
When implementing changes such as Salary Sacrifice or adjustments related to death benefits and IHT, clear and effective communication is essential. Helping employees understand the implications of these changes fosters trust and engagement, particularly during periods of financial and regulatory transition.
Key Pension Updates.
While significant reforms to pension taxation were anticipated, the budget’s primary focus was on the inclusion of death benefits from accrued pension funds under IHT. Key highlights include:
– The tax-free amount remains unchanged, capped at 25% or £268,275.
– The Annual Allowance stays at 100% of salary.
– Tapered Annual Allowance rules apply to individuals with Adjusted Earnings exceeding £260,000.
– The Lifetime Allowance cap will not be reinstated.
The State Pension will maintain the triple lock, leading to a 4.1% increase in April 2025 and the annual pension would rise from £11,502 to £11,973.
Taxation of Pension Death Benefits.
Historically, pension schemes allowed wealth transfer without IHT liability, though this was not the system’s intended purpose. A new consultation, effective April 2027, will evaluate the inclusion of unused pensions and death benefits under IHT. The review will consider:
– The use of pensions as tax-planning tools.
– Taxation of discretionary and non-discretionary death benefits to be done separately.
Pension benefits currently distributed at the discretion of trustees are excluded from a deceased individual’s estate for Inheritance Tax (IHT) purposes. However, starting in 2027, these benefits may become subject to IHT if the estate exceeds the applicable threshold. Existing exemptions, such as the spouse IHT exemption, the £325,000 nil-rate band, and the £175,000 residential nil-rate band.
