Employers are already paying higher national insurance payment thanks to the last Budget. But many are clearly concerned that the chancellor has another target in her sight: ension salary sacrifice schemes.
These are under renewed scrutiny following HMRC research, with experts warning the government may be considering reforms to help plug the growing gaps in public finances, a move that could raise employer costs and disrupt established workplace savings strategies.
The HMRC-commissioned research examines how businesses use salary sacrifice and how they might respond to potential reforms. LCP partner and former pensions minister Steve Webb says it was “very revealing” that HMRC had paid for this research.
Webb says: “This research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.”
“Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today. With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure”.
Reform
The HMRC-commissioned research, conducted in summer 2023 under the previous government, surveyed 51 employers to understand their experiences and attitudes toward salary sacrifice for pensions. It also explored how hypothetical changes to the current tax and National Insurance reliefs might alter employer behaviour. The study tested three scenarios, which include removing NI exemptions for both employers and employees; removing both NI and income tax exemptions for employees; and capping NI exemptions to apply only to salary sacrifice amounts up to £2,000 per year.
Employers were most resistant to the second option, saying it would eliminate the rationale for using salary sacrifice at all. The £2,000 cap was seen as a more measured approach, but even this would erode benefits, particularly for higher earners or companies with more generous schemes.
Evelyn Partners financial planning partner Gary Smith agrees that while the consultation was initiated before the current government took office, the pressures on the public purse make it likely the findings are being taken seriously.
He says: “Salary sacrifice has come under scrutiny before, and it wouldn’t be surprising if it’s being considered again. It’s a highly efficient way to save, especially for basic-rate taxpayers who gain an 8 per cent NIC advantage. Any dilution would impact pension saving and also damage confidence in the system. For employers, it’s a proven method of offsetting rising employment costs, especially with NIC increases due in 2025.”
Reliance
Salary sacrifice has become an essential part of many employers’ pension funding strategies since the introduction of auto-enrolment. Its appeal has only increased following April’s hike in employer National Insurance contributions (NICs), from 13.7 per cent to 15 per cent, and the lowering of the earnings threshold from £9,100 to £5,000.
Aegon UK head of pensions Kate Smith says: “Salary sacrifice allows employees to exchange part of their salary for non-cash benefits, such as pension contributions, in a tax-efficient manner. These contributions are exempt from income tax and NICs, making them attractive and more affordable for both employers and employees.”
The concern is on salary sacrifice supporting both pension saving and helping employers manage costs, especially as wages rise.
Cost
In a standard arrangement, an employee earning £40,000 who contributes 5 per cent of their salary to a workplace pension, with their employer adding 3 per cent, makes their pension contributions from income that has already been taxed, meaning they pay income tax and National Insurance on their full salary.
But in a salary sacrifice arrangement, the employee gives up part of their salary before tax, lowering both their and their employer’s tax liabilities. HMRC loses around £460 in tax revenue, a relatively small amount per employee but potentially significant when multiplied across the UK workforce.
Risk
EY-Parthenon DC pensions & financial education strategic adviser Saq Hussain warns that changes to salary sacrifice could translate directly into financial strain for employers.
“I think with the NI and minimum wage changes, employers have enough on their plates already. Messing with salary sacrifice now is going to make things tougher. More cost is likely to mean fewer jobs. If you’re running a business and suddenly have to pay more for the same outcome, something’s got to give. And like we are seeing, it’s going to be job cuts or freezes in hiring.
Hussain adds that employees could be hit with a loss of up to £500 per year or more in tax savings, money that would otherwise go toward building long-term financial security.
He adds: “Less going into pensions means more worry down the line, which surely goes against what the government is looking to achieve,
“I’ve seen salary sacrifice work well and it would be a shame to make it less effective. Because if this goes ahead, everyone’s going to feel it.”
Inequality
Haines Global Pensions co-founder and CEO Colin Haines notes that any reform could have uneven effects across the business landscape.
He says: “If salary sacrifice for pensions is stopped, then it is clear some employers and employees will see an increase in costs. Some pension contributions could be reduced. Employers also provide salary sacrifice for other benefits such as company cars, childcare vouchers and Cycle to Work schemes. There is no mention of any potential changes to these other arrangements.
“However if there is a tax benefit only being utilised by 30 per cent of employers, then this may give good reason to stop or change it. The government may feel that this is too low a figure to keep it going. This may also be a change that won’t hit small businesses as much as big businesses, and so potentially more welcome by the smaller ones (who have been hit hard by other recent changes to NI).”
Policymakers
Salary sacrifice reduces tax revenue but is important for helping many people save for retirement, especially lower and middle earners. Cutting it back could affect retirement savings, employee loyalty, and wider economic plans but with budget pressures and growing uncertainty, both businesses and workers could soon face tough decisions about this key savings option.
Kate Smith says: “Any move to reduce or remove the benefits of salary sacrifice would be a blow to both employers and pension savers, potentially leading to and lower retirement savings outcomes. It could also impact the government’s growth agenda if there was a reduction in contributions flowing into growth assets. While no policy changes have been confirmed, the release of this research has intensified scrutiny ahead of the Budget.”
