On 27 May 2025 HMRC published a research paper titled ‘Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions’ (‘arrangement’). The paper considers three scenarios where hypothetical cuts to pension tax and National Insurance (NI) reliefs are made, and the respondents were asked how this would affect their offering of the arrangement.
Bearing in mind that the research paper was commissioned in 2023, the question is given the timing of the release of the paper, should we expect changes to the use of pension salary sacrifice in this year’s Autumn Statement?
What is salary sacrifice?
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit; in this case, the amount of employee’s pension contributions.
Salary sacrifice survey findings
The field work was undertaken May-August 2023 and the sample consisted of 51 companies, 41 of which offered the arrangement and 10 did not. Those who did offer the arrangement, the main findings were:
- most employees accepted the offer to participate in a pension salary sacrifice arrangement.
- the main motivation for offering was the employer and employee NI savings.
- most participants were not sure how the employer NI savings were used. Some did say they passed on their savings to enhance the employees’ pension contributions.
- it was easy to administer.
- it was a good recruitment and retention tool.
- generally, employers had good understanding and found the concept easy to explain to their employees.
Contrast that with the 10 employers who did not offer the arrangement, their reasons were:
- additional administration.
- size of the business did not justify the additional administration.
- lack of knowledge.
- no request from employees to implement an arrangement.
Hypothetical cuts
The survey also presented three alternative hypothetical arrangements for participants to consider. Participants who offered the arrangement were represented with three hypothetical scenarios using a baseline arrangement of an employee earning £35,000 and who sacrifices 5% (£1,750) of their salary for an equivalent employer pension contribution. The employer contributes 3% (£1,050), so in an arrangement situation, the employer would contribute 8% in total (£2,800).
Scenario 1
Removal of the NI ‘exemption’ for both employers and employees resulting in the amount of NI being charged on the salary sacrificed.
Scenario 2
Removal of NI ‘exemption’ for both employers and employees as well as pension tax relief for the employee.
Scenario 3
Removing NI exemption on salary sacrificed above £2,000 per annum.
Feedback
- all three would affect staff morale.
- affect recruitment.
- disincentivise pension savings.
- not surprisingly, employers were most negative about the second option. The third option was most favoured.
- but some mentioned that scenario three would add a layer of complexity.
- some employers may eliminate offering the arrangement.
- some employers would pass on the additional costs to the customer so the prices would increase.
What does this mean for employers?
Most commentators consider the timing of the report is not coincidental and may point to Government’s direction of travel.
If employers do not currently offer this arrangement, they should consider doing so now to help optimise savings and be in a position to benefit from any transitional provisions at some point in the future. Furthermore, once in place, it is our experience that a properly implemented arrangement will not require any significant work to ensure it operates effectively.
Please contact the HaysMac Employment Tax team at Employmenttax@haysmac.com should you have any questions.
