Pension salary sacrifice schemes could be for the chop as changes are “firmly on the agenda” ahead of the next Budget, a former pensions minister has warned.
The warning came as the government published research that showed it had tested employer responses to hypothetical changes that would reduce or end the benefit savings for employers and employees.
Steve Webb, partner at pension consultants LCP and a former pensions minister, said the research highlights a significant risk of cuts in the government’s autumn Budget.
The research published in the HMRC-commissioned study, titled ‘Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions’, showed that employers were positive about the current salary sacrifice set up and thought it helped to retain employees as part of the overall benefits package.
A number of employers said they passed on the employer NI saving to their employees, but for others the savings were absorbed by the firm as a reduced employment cost.
Hypothetical scenarios put to employers by researchers included:
- Removing the NI exemption for employers and employees, resulting in employer and employee NI charges on the salary that the employee sacrificed.
- Removing the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed.
- Removing the NI exemption but only on salary sacrificed above a £2,000 per year threshold.
Researchers found that employers were most negative about the option to remove both NI and tax breaks for salary sacrifice. Some employers said that this would end the benefit of operating salary sacrifice and told researchers they were unsure whether they would continue to operate them for pensions in that scenario.
The reform that received the most positive response was the scenario where salary sacrifice would be capped, but allowed for smaller amounts.
Webb said: “It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back. 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.”
Any reduction in this benefit could be a blow for employers as salary sacrifice has been described as a “lifeline” for businesses hit by rises in employer NI that came into force in April 2025.
Fieldwork for the government report took place in May-August 2023 and included interviews with 51 firms, 41 of which offered salary sacrifice and 10 of which did not. The research has only just been published today.
