For years, if you were a savvy owner-manager, you’ve probably heard some version of this advice:
“Keep your salary low, take dividends, and use salary sacrifice into your pension, it’s very tax-efficient.”
And for a long time, that’s largely been true.
But the game is changing.
The government has signalled plans to bring National Insurance (NI) into the mix on salary-sacrifice pension contributions in the coming years, and that has big implications if you’ve built your director pay strategy around this setup.
Let’s break down what’s going on, what might change, and what you should be thinking about now rather than when it’s too late.
Quick recap: how salary-sacrifice pensions work (and why everyone loves them)
Salary sacrifice is simple in principle:
- You give up (sacrifice) part of your salary.
- Your employer (which might be your own company) pays that amount into your pension instead.
- Because your official salary is lower, both you and the company can save tax and NI.
Traditionally, the benefits have been:
- Lower employee NI for you.
- Lower employer NI for the company.
- A bigger pension contribution going in gross.
So for directors and senior staff, it’s been a neat way to boost long-term savings while cutting today’s tax and NI bill.
No wonder it’s become a standard piece of planning for owner-managed businesses.
What’s changing: NI on salary-sacrifice contributions
The direction of travel from the government is clear:
They want to charge NI on salary-sacrificed pension contributions in future.
In other words, the bit you currently “save” in NI by routing income via pension contributions rather than salary is being lined up for removal.
You’d still get the pension tax relief, but the NI advantage would be reduced or removed.
The idea is to phase this in over time, but from a planning perspective, the important point is this:
- A strategy that looks brilliant today could look a lot less clever in 5–10 years’ time.
If your director package leans heavily on salary sacrifice, you don’t want to be the last one to adapt.
Why this matters so much to owner-managed businesses
If you’re a typical small business owner or director, you may well have:
- A relatively modest salary
- A mix of dividends
- A healthy pension contribution going in via salary sacrifice
So your current logic might be:
- “I’m keeping my tax and NI bill down.”
- “I’m being responsible and building up a pension.”
- “My accountant and I sorted this years ago and it’s working fine.”
The problem is that most of this planning was designed for:
- Different NI rules, and
- Different dividend and income tax rules.
With NI moving onto salary sacrifice, part of the core advantage of that structure disappears.
That doesn’t mean pensions stop being a good idea, far from it. It just means the numbers change and need to be re-run.
A simple comparison: now vs future
Let’s simplify and use round numbers just to illustrate the direction of travel.
Right now (simplified example):
- You sacrifice £20,000 of salary into your pension.
- Your taxable salary drops, so less NI is due.
- The company also saves on employer NI.
- The full £20,000 (plus potentially part of the NI saving) lands in your pension.
In future, once NI applies to salary-sacrifice contributions:
- You sacrifice that same £20,000.
- The contribution still goes into your pension
- But NI is now charged as if that amount were salary.
- So the NI saving shrinks or disappears.
Outcome?
- You still get long-term pension growth and tax relief.
- But the “clever” NI edge you’ve been enjoying is dulled or gone.
Again, pensions aren’t the issue. The issue is that the tax-efficiency ranking of different ways to pay yourself is shifting.
The hidden risk: sleepwalking into a worse setup
The biggest danger I see with changes like this is not that people panic.
It’s that they do nothing.
They assume:
- “I’ve got a tax-efficient structure, my accountant sorted it years ago.”
- “Pensions are always a good thing, so I’ll just carry on.”
If the rules change and your strategy doesn’t, you could end up:
- Paying more NI than you expected.
- Locking money into a pension when another route might now be similarly efficient without tying it up.
- Missing chances to reorganise things while you still have time to do it gradually.
With tax, doing nothing is a decision, it just often turns out to be an expensive one.
So what should you be thinking about now?
Rather than waiting for the final detail to be announced and then scrambling, this is the perfect time to step back and look at the bigger picture.
Here are the key questions I’d want every director to answer:
1. How reliant is your plan on salary sacrifice?
- What proportion of your overall package is going in via salary-sacrifice pension?
- If the NI advantage disappeared tomorrow, would that materially change how attractive it looks?
- Are you over-weighted into this one tactic?
2. What’s your actual long-term wealth strategy?
Pension planning shouldn’t sit in a vacuum.
Look at your wider picture:
- How much wealth do you want inside your pension, vs
- Inside company retained profits, vs
- In ISAs, vs
- In property or other investments?
If the salary-sacrifice angle becomes less attractive, you might want a slightly different balance between these pots.
3. Are there better ways to use your company to build wealth?
For some clients, we find that:
- After a certain level of pension funding, it can be more efficient to
- Keep more cash in the company for future investment, or
- Use the company to invest in certain assets, or
- Restructure the way profits are extracted over time.
The point isn’t “pensions bad, companies good”, it’s that the best mix depends on where the tax system is heading, not just where it’s been.
4. Are you using pension contributions in the best way?
If you still want to make strong pension contributions (and in many cases you should), it’s worth asking:
- Should they all be done via salary sacrifice, or
- Should some be made as straight employer contributions from the company?
- Are you close to any of the pension annual allowance limits?
- Do you have unused allowances from previous years that could be used before rules tighten further?
A considered approach here can save a lot of friction later.
Pensions will still matter, the method may need to change
Let me be clear:
- I am not anti-pension.
- I am not saying “stop using salary sacrifice tomorrow”.
What I am saying is:
The rules that made your current director pay structure clever a few years ago may not be the rules we’re living with in a few years’ time.
That’s why you don’t want to treat your setup as “job done forever”.
You want it to be reviewed and refreshed against the new reality, especially if you’re putting serious money through that route every year.
How we can help at MDH
If you’re a director or business owner and this hits a nerve, here’s what we can do together.
We can sit down and:
- Map your current position
- Salary, dividends, pension contributions (including salary sacrifice), property and other income.
- Model what happens as rules change
- What if NI applies to your salary-sacrifice contributions?
- What if thresholds stay frozen?
- What does that do to your total tax + NI bill over the next few years?
- Design a more future-proof remuneration and wealth plan
- Adjust the blend of salary, dividends and pensions.
- Consider where each pound is best placed: pension, company, ISA, property.
- Build a plan that still works if the government keeps tightening the screws.
If you’d like to get ahead of this rather than waiting for HMRC to confirm it on your tax bill, ask us about a “Future-Proof My Pension Strategy” review.
Because what’s tax-efficient today is not guaranteed to stay that way, and the sooner you adapt, the more options you’ve got.
