Budget 2025: Employment taxes
Salary Sacrifice pensions
The government will charge employer and employee National Insurance (NI) on pension contributions above £2,000 per annum made via salary sacrifice. This will take effect from 6th April 2029.
In a salary sacrifice scheme, employees can forgo some of their salary, in exchange for an additional employer pension contribution. This amount sacrificed does not currently attract any NI for either employer or employer. This is therefore a tax efficient arrangement and is widely used – especially if employees are seeking to reduce earnings below thresholds for income tax, or high-income child benefit.
From 6th April 2029, this NI saving will be capped at £2,000, after which amounts will be subject to both employee and employer NICs. These rates of NIC will be 15% for employers and 8% for employees with earnings less than £50,270 and 2% on income above that.
At present, employees are automatically enrolled into employer pension schemes and the minimum contribution level is 5%. Therefore, this measure is likely to impact anyone with a salary above £40,000 in a salary sacrifice arrangement.
By way of example, an employee earning £120,000 and saving £20,000 into their pension via salary sacrifice (a sensible amount to bring taxable income to £100,000 and preserve the personal allowance). From April 2029, this would result in the employer paying an additional £2,700 and the employee paying an additional £360, in NICs.
Gravita’s view
This was widely reported prior to the Budget and is going to be another additional cost for employers, who will find the pressure mounting with the rise in the minimum wage and the NIC increases in last year’s budget, as well as the employee.
The Chancellor is very proud that her Budget stuck to the key tenet of Labour’s manifesto, not to raise Income Tax, National Insurance or VAT – particularly for working people. We are struggling to see how this is not a National Insurance rise on working people who are looking to do the right thing and save for their retirement.
It is obvious of course that these changes will reduce the amount that an employee will be saving towards their retirement. Moreover, it is possible that some employees will take the view that salary sacrifice arrangements are simply not worth it anymore, and that they would rather have the cash in their pocket to help them save for a house or go on holiday. Not exactly an ideal outcome given that workplace pensions have been so successful in encouraging – If not forcing – many who may not have otherwise done so, to save for their retirement.
Maintaining thresholds for Income Tax and National Insurance, from April 2028
The government is maintaining personal tax thresholds and the National Insurance contributions (NICs) secondary threshold from 2027-28 until 2030-31, in addition to retaining the starting rate for savings, which will also be stay at £5,000.
The personal allowance, and income tax thresholds were due to increase by CPI from 6th April 2028 (having already been frozen since 2021), however this has now been extended until at least 5th April 2031. Equally National Insurance thresholds, will remain aligned to the Income Tax thresholds and will also be maintained.
Gravita’s view
Whilst this was not the increase in income tax rates that were rumoured, this policy will affect millions of taxpayers who will experience ‘fiscal drag’. Essentially as wages rise and the tax bands remain frozen more people will pay more tax. The OBR, estimates the freeze in these tax thresholds, will raise an additional £67 billion by the end of the decade, and by that date also cause 700,000 more people to be brought into Income Tax, who otherwise would not have paid tax if the personal allowance was in line with inflation.
We will let you decide whether this is in keeping with the Chancellor’s promise not to raise taxes on working people.
Plan 2 student loan repayment threshold to be frozen
The student loan Plan 2 repayment threshold is to be maintained at 2026-27 levels for three years from 2027-28 to 2029-30 tax years.
You are typically on a Plan 2 student loan repayment plan if you started studying a relevant course after 1st September 2012 (prior to this it was Plan 1). The Plan 2 student loan repayments are calculated at 9% of annual income over £28,470 and this threshold will remain frozen until at least 2030.
Tax treatment of payments received for cancelled, moved or curtailed shifts
Following the introduction of the Government’s Employment Rights Bill, workers will receive the right to receive payments for their employers if their shifts are cancelled, moved or curtailed at short notice. This measure puts beyond doubt that this payment is subject to income tax.
Gravita’s view
The Employment Rights Bill includes a myriad of provisions that significantly alter the rights of workers in certain situations. If you have not done so already, and you are an employer, we strongly recommend that you seek advice on its impact.
Image rights payments
From 6th April 2027 all image rights payments related to an employment will be taxed as employment income and subject to income tax, and employer and employee National Insurance contributions.
Gravita’s view
This is likely to impact most on high profile individuals, such as athletes and entertainers and seems a fair measure, as it would be hard to argue it is not employment income.
Abolition of Homeworking Expenses
The government will remove the deduction from Income Tax for non-reimbursed home working expenses. Employers can still reimburse employees for these costs where eligible without deducting Income Tax and National Insurance contributions. This will be legislated for in Finance Bill 2025-26 and take effect from 6th April 2026
Gravita’s view
If you have been claiming homeworking expenses (around £312 a year), that’s ending from April 2026. This is unless your employer reimburses the costs.
HMRC says too many claims were ineligible, and the relief was originally expanded during COVID but isn’t needed in the same way now.
There is a clear push to get more people back into the office, especially with rail fares now frozen. That shift could create real challenges for parents juggling school runs and put extra pressure on employers who downsized office space during the remote-working boom.
Expanding workplace benefits relief
The income tax and National Insurance exemption for employer-provided benefits will be extended to cover reimbursements for eye tests, home working equipment, and flu vaccinations. This will be legislated for in Finance Bill 2025-26 and this will take effect from 6 April 2026.
Gravita’s view
The policy means lower tax and NICs for employees on everyday work-related costs however, the delay means those savings won’t arrive until April 2026. This a small but welcome saving.
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