Workplace pension salary sacrifice schemes could be under threat as HMRC explores options

Valuable workplace pension salary sacrifice schemes could be changed as a "revenue-raising measure" in the Autumn Budget, a former pensions minister has said.

Pension salary sacrifice is where an employee agrees to forgo or ‘sacrifice’ part of their salary in return for their employer making additional pension contributions on their behalf.

As the employee's taxable salary is lower, they pay less income tax and National Insurance. The employer also saves on National Insurance contributions as they're calculated based on the gross salary.

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HMRC has published research around ‘hypothetical’ cuts to salary sacrifice for workplace pensions, which employers have said would make them consider closing the schemes.

According to Steve Webb, former pensions minister and partner at pension consultancy LCP, the move shows potential cuts to salary sacrifice are “firmly on the agenda” for the Autumn Budget.

Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today, he 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,” said Webb.

“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”.

MoneyWeek has contacted HM Treasury asking for comment.

Could you retire early with salary sacrifice?

Salary sacrifice schemes are a valuable workplace savings perk. Workers could retire a year early by taking advantage of pension salary sacrifice, according to analysis from Scottish Widows.

The figures show employees on an average salary of £34,963 a year – who take home £27,294 after tax – could increase their take home pay by £140 a year by opting into their employer’s salary sacrifice scheme and taking advantage of the tax benefits.

Workers redirecting this extra cash into their pension savings, alongside the savings the employer makes through reduced National Insurance contributions, could result in an extra £463 paid into their pension each year.

Over the course of 25 years and assuming 5.4% growth, this could add £35,900 to their pension pot – equal to a whole year’s salary.

We look at other ways to boost your pension pot in a separate guide.

What did HMRC’s research into salary sacrifice for pensions find?

The government has today published research commissioned by HMRC entitled “Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions”.

As well as asking general questions about attitudes to salary sacrifice as it currently stands, the research tested employer reaction to three different ways in which the benefit could be ‘hypothetically’ cut back.

The three hypothetical reforms tested were:

1. Removing the National Insurance exemption for employers and employees, resulting in employer and employee National Insurance charges on the salary that the employee sacrificed.
2. Removing the National Insurance exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed.
3. Removing the National Insurance exemption but only on salary sacrificed above a £2,000 per year threshold.

Employers were most negative about the second option, which involved removing both National Insurance and tax breaks for salary sacrifice.

Some employers said that this would eliminate the benefit of operating salary sacrifice and were unsure that they would continue to operate salary sacrifice for pensions in that scenario.

The most favourably viewed reform was one where salary sacrifice would be capped, but allowed for smaller amounts of sacrificed salary.

The fieldwork was undertaken in May to August 2023 and involved interviews with 51 firms, 41 of which offered salary sacrifice and 10 of which did not, but it has only just been published.

With regard to the current system, employers were positive about salary sacrifice and thought it helped to retain employees as part of the overall benefits package.

Some said they passed on the employer NI saving to their employees, but for others it was simply absorbed by the firm as a reduced employment cost.

Employers could scrap salary sacrifice schemes

Salary sacrifice schemes are worthwhile to employees but since the hike in employers’ National Insurance contributions (NICs) this April they are also increasingly valuable to employers.

The rise in employer NICs, from 13.8% to 15%, came into effect on 6 April. At the same time, the threshold at which NICs are paid dropped by nearly 50%, from £9,100 to £5,000 – adding a further burden on employers’ ability to balance the books.

Huge savings could currently be made by employers who offset the increase in employer National Insurance contributions by moving to salary sacrifice for their staff pension contributions, said pension consultancy Hymans Robertson.

From 6 April 2025, for every £100,000 of salary employees sacrifice into their pension, the saving in employer NICs will be £15,000.

Hannah English, head of defined contribution corporate consulting at Hymans Robertson, said: “The savings employers could benefit from, by introducing a salary sacrifice system for employee pension contributions, should not be understated.

“Employers who already have a salary sacrifice system in place should maximise employee pension contributions in this way.

“They could also encourage further savings into a pension through other means – for example, through bonus sacrifice. This would help mitigate the changes that came into place in early April while improving the retirement prospects of existing employees.”

However, without the benefits to employers, which could be lost by the potential cuts to salary sacrifice schemes as laid out in the HMRC paper, some employers said they would have to reconsider their usefulness.