As HMRC considers alternatives, workplace pension salary sacrifice plans may be in jeopardy

Research that examines potential reductions in salary sacrifice for workplace pensions has been published by HMRC

A former pensions minister has suggested that useful workplace pension salary sacrifice programs might be modified as a "revenue-raising measure" in the Autumn Budget.

Employees who agree to forgo or sacrifice a portion of their pay in exchange for their employer making additional pension contributions on their behalf are said to be participating in pension salary sacrifice.

The employee pays less in income tax and national insurance because their taxable salary is lower. National Insurance contributions are also reduced for the employer because they are determined by the gross salary.

Employers have stated that they would consider closing the schemes as a result of HMRC's published research on hypothetical reductions to salary sacrifice for workplace pensions.

The action demonstrates that possible salary sacrifice reductions are "firmly on the agenda" for the Autumn Budget, according to Steve Webb, a former pensions minister and partner at pension consultancy LCP.

The desire to raise more money is, if anything, even more pressing now, he said, even though the research was commissioned under the previous administration.

"That HMRC has funded research into the likely reaction from employers if salary sacrifice for pensions were to be scaled back is very revealing," Webb said.

"According to this research, changes to salary sacrifice are firmly on the agenda and likely to be considered as a potential revenue-raising measure, especially since the Chancellor is reportedly looking to close a multi-billion-pound hole in the public finances in her Autumn Budget."

BFIA has reached out to HM Treasury for a response.

Could you sacrifice your salary to retire early?

Schemes for salary sacrifice are a great way to save money at work. According to a Scottish Widows analysis, employees could benefit from pension salary sacrifice and retire a year earlier.

According to the data, employees who earn an average of 34,963 annually and take home 27,294 after taxes could increase their take-home pay by 140 annually by choosing to participate in their employer's salary sacrifice program and benefiting from the tax advantages.

Employees could receive an additional 463 paid into their pension annually if they redirect this additional money into their pension savings in addition to the savings the employer receives from lower National Insurance contributions.

In 25 years, assuming 5.4 percent growth, this could increase their pension fund by 35,900, or a full year's salary.

Other strategies to increase your pension fund are examined in a different guide.

What findings did HMRC's study on pension salary sacrifice reveal?

Today, the government released a study titled "Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions" that was commissioned by HMRC.

In addition to surveying employers about their opinions regarding salary sacrifice as it stands today, the study examined their responses to three potential reductions in the benefit.

The following three hypothetical reforms were examined.

Eliminating the employer and employee national insurance exemption, which would have resulted in national insurance fees on the employee's sacrificed salary. eliminating the income tax exemption for workers and the national insurance exemption for employers on the sacrificed salary. removing the exemption from national insurance, but only for salary sacrifices exceeding a yearly threshold of £2,000. The second option, which would have eliminated both National Insurance and tax breaks for salary sacrifice, was the one that employers were most against.

Some employers expressed uncertainty about whether they would continue to implement salary sacrifice for pensions in that situation, claiming that it would eliminate the benefit of doing so.

The reform that was most positively received was one that allowed for smaller amounts of salary sacrifice while capping it.

Only recently has the fieldwork, which took place from May to August 2023 and involved interviews with 51 companies41 of which offered salary sacrifice and 10 of which did notbeen published.

As part of the total benefits package, employers viewed salary sacrifice as beneficial to employee retention under the current system.

Others claimed that they simply absorbed the employer's savings as a lower employment cost, while others claimed that they passed the savings on to their staff.

Salary sacrifice plans could be abandoned by employers.

In addition to being beneficial to employees, salary sacrifice plans have grown in value for employers since the increase in employers' National Insurance contributions (NICs) in April.

On April 6th, the increase in employer NICs from 13.8% to 15% became operative. Simultaneously, the NIC payment threshold decreased by almost 50%, from 9,100 to 5,000, making it more difficult for employers to balance their books.

According to pension consultancy Hymans Robertson, employers who switch to salary sacrifice for their employees' pension contributions could currently save a significant amount of money by offsetting the increase in employer National Insurance contributions.

Beginning on April 6, 2025, there will be a 15,000 employer NIC savings for every 100,000 salary employees contribute to their pension.

Employers could save money by implementing a salary sacrifice plan for employee pension contributions, according to Hannah English, head of defined contribution corporate consulting at Hymans Robertson.

Employers should maximize employee pension contributions in this manner if they currently have a salary sacrifice program in place.

"They might also promote additional pension savings through different strategies, like bonus sacrifice. By doing this, current employees' chances of retiring would be enhanced and the changes that were implemented in early April would be lessened.

Employers, however, stated that they would have to reevaluate the value of salary sacrifice plans in the absence of the advantages that could be lost due to possible reductions, as outlined in the HMRC report.