Following recent policy changes, the Chancellor is widely believed to be considering possible tax rises at the Autumn Budget – could one of those changes be to restrict the benefits of salary sacrifice for employee pension contributions?
How does salary sacrifice work for pension contributions?
Salary sacrifice allows employers and employees to save tax by changing how employees make their pension contributions. Instead of making the pension contributions personally, employees give up the right to an amount of their salary equal to their desired contribution. In exchange, their employer makes extra contributions to their pension scheme on their behalf. As there is no National Insurance charged on pension contributions paid by an employer, both the employee and employer can save National Insurance on the amount of salary sacrificed.
In a recent research document – commissioned under the previous Government in March 2023, but published this year – HMRC explored the attitudes of a small group of employers to salary sacrifice. The research sought to understand why those employers did (or did not) use salary sacrifice for pension contributions, and how they might respond to three hypothetical changes.
Why do employers use salary sacrifice for employee pension contributions?
Unsurprisingly, the research concluded that the majority of employers offering salary sacrifice for pension contributions were motivated to do so by the National Insurance savings. Of the employers that offered it, all reported high employee uptake. Employers felt that their employees regarded it favourably, with some employers actively promoting it as an employee benefit. Most employers said they were familiar with the scheme and found it easy to administer.
For those that did not offer salary sacrifice for pension contributions, reasons included concerns over administrative burdens, a belief that it was not worthwhile for smaller businesses, and concern about their lack of knowledge. This group also said they hadn’t received any demand from employees and that it was not appropriate for lower paid staff, as employees are not allowed to sacrifice their pay to below the National Minimum Wage/National Living Wage.
Potential changes
The final part of the research asked how employers who offered the scheme would react to three hypothetical scenarios which would reduce the benefits of using salary sacrifice to make pension contributions:
- The removal of the National Insurance savings– so employees and employers would start to pay National Insurance on the salary sacrificed.
- The removal of both National Insurance and Income Tax benefits on the salary sacrificed, meaning contributions would suffer both Income Tax and National Insurance charges.
- A restriction in National Insurance benefits to the first £2,000 of salary sacrificed.
None of these options were popular. Options one and two were the least well-received, with employers saying option two would lead them to stop offering salary sacrifice for employee pension contributions. Employers were less certain about withdrawing if option one was introduced, but it is difficult to see why employers would continue with the scheme in these circumstances when simpler solutions would achieve the same Income Tax effect for employee pension contributions. Option three was the least unpopular, with employers feeling the reasons behind it may be easier to explain to employees.
Is it worth starting to offer salary sacrifice for employee pension contributions?
For employers not already offering salary sacrifice, the research shows that those who have made the transition have found it beneficial, their employees welcome it, and they did not report the administrative burden as a concern.
However, given the recent research, some employers may have concerns about introducing salary sacrifice for pension contributions if there is a risk of potential changes to the scheme in the near future. One option might be to delay implementing a new scheme until after the Budget, in case the work setting up a scheme is wasted. However, conversely, some commentators are suggesting adopting this approach to pension contributions before the Budget as either we will see no changes, and employers can start saving sooner, or any changes might come with transitional protections for those already using salary sacrifice in this way.
And finally…
One concerning finding from the report was the lack of understanding that many of the employers surveyed had regarding how tax relief works for employer-provided pensions. If this is something that worries you, we have a back to basics article on employer pension contributions that might help.
This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.
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