Budget Update 2024

Following the recent budget announcements, we wanted to provide a summary of any key changes that may impact employee benefits, particularly around pensions, risk, and National Insurance Contributions. 
As always, the team at Howden is here to answer your questions and we will continue to monitor developments, providing updates on any further changes as soon as they are announced.

Summary of Key Points:

Announcements in the budget that directly impact Employee Benefits were few, however, here is a roundup of some key changes and how they might impact your business.

Pensions and Risk

Details of an announcement that will potentially impact death benefits are currently being reviewed. In practice we believe the impact is limited to death benefits funded from accrued pension funds, as opposed to benefits from Group Life Assurance Schemes. Further clarification is anticipated, and we will keep you informed of any relevant changes.

Health

There were no direct announcements in the budget affecting health benefits. While some had anticipated an increase to Insurance Premium Tax (IPT), no changes were made.

Employer National Insurance Contributions and Salary Exchange

From April 2025, Employers’ National Insurance Contributions will increase from 13.8% to 15%, which is likely to influence employer spending priorities. 

However, we believe this increase also presents a valuable opportunity for businesses to ensure tax efficiency through salary exchange (or salary sacrifice) options. 

While SMEs face higher Employer National Insurance (NIC) contributions and increased tax bills, they can address both these challenges and address the UK’s retirement shortfall. 

By implementing salary sacrifice, employers can save 15% on Employer NICs on employees’ pension contributions, helping offset some additional costs whilst making a positive contribution to their employee’s retirement outcomes.

With upcoming changes to auto-enrolment contribution thresholds and the removal of the lower limit, now is the perfect time to review both pension contributions and broader remuneration strategies.

If you require further information on the benefits of Salary Exchange, we have produced a guide for employers here.

Pensions: Key Points from the Budget

Significant changes to pension taxation were anticipated, but in practice, only one minor tax rule is affected. Key points remain:

• No changes to the amount members can take tax-free, capped at 25% or £268,275.
• The Annual Allowance remains at 100% of salary, up to £60,000.
• Tapered Annual Allowance rules continue for employees with Adjusted Earnings above £260,000.
• No reintroduction of the Lifetime Allowance cap.
• Tax relief for employees remains at their marginal rate, with no removal of NI relief for employer or employee contributions made via salary exchange.

The State Pension will continue under the triple lock, with a 4.1% increase in April 2025, raising the full state pension from £11,502 to £11,973 annually.

Tax on Pension Death Benefits

Historically, pension schemes have enabled wealth transfer without inheritance tax (IHT) liability, though this was not the intended purpose of retirement funding. 

The Chancellor has now announced a consultation on bringing unused pensions and death benefits into the IHT scope from April 2027. This review will explore:

•    The incentive to use pensions as a tax-planning vehicle.
•    How discretionary vs. non-discretionary death benefits are taxed.

Currently, pension benefits paid at the trustees' discretion are not included in the deceased’s estate. 
From 2027, these may be subject to IHT if the estate exceeds the threshold. The IHT exemption for spouses and the £325,000 nil rate band (alongside the £175,000 residential nil rate band) will remain frozen until April 2030. 

The consultation period runs from October 30, 2024, to January 22, 2025, and we will provide further updates as the position develops.

Communicating changes with employees

Effectively communicating these changes to your employees will of course be crucial to help them understand the updates to their benefits and the potential tax advantages of mechanisms like salary exchange. Clear communication can enhance employee trust and engagement, particularly in periods of change.

As new developments emerge, we will keep you informed to support timely and transparent communication with your employees, ensuring they are aware of how these changes impact them.

As ever, Howden can support you with any questions and will continue to keep you updated on developments. Please contact us for further information or guidance on how these changes might affect your employee benefits strategy.