HMRC publishes research on salary sacrifice arrangements for pensions

On May 27, 2025, HMRC published research which aimed to understand the experiences, motivations, and attitudes of employers towards using salary sacrifice arrangements for pensions. The research also explored whether three hypothetical changes to relevant tax reliefs (such as reform of NI) on contributions via salary sacrifice arrangements could impact employers’ motivations towards providing this savings avenue. 

Salary sacrifice results in a lower taxable salary for the employee, so they pay reduced income tax and NI. The employer also saves on NI contributions as these are calculated on gross salary. The research revealed that employers’ main motivation for offering salary sacrifice for pensions was that it was beneficial for both the employer and employees due to the national insurance (NI) savings for both parties. 

Generally, employers found pensions salary sacrifice easy to explain to their employees, and simple to administer and manage, once set up. 

The research explored three hypothetical scenarios changing the tax treatment on pensions salary sacrifice arrangements:

1. Removal of the NI relief for employer and employee on salary sacrificed pension contributions.
2. Removal of the NI relief for employer and employee on salary sacrifice contributions plus applying income tax as a benefit in kind employer pension contributions.
3. As scenario 1 above but where the NI exemption for salary sacrifice pensions was removed in respect of employer contributions beyond a threshold of £2,000 per year.

All three hypothetical changes were viewed negatively by employers, with one noting that “The more you change a product, and the benefits people get, the less attractive they become.” 

Several employers highlighted the additional administrative costs that any change would entail, as well as viewing “yet another tweak” to the pensions system as reducing savers’ engagement with pension saving generally.

Comment

The suggestion that the Government might be considering an overhaul of the salary sacrifice system for pension contributions has caused concern. The principal advantage of the current system (although it is not offered by all employers) is that pension contributions are made pre-tax and many employers use the NI savings to boost their employees’ pensions in some way. 

It is far from certain that HMRC has any intentions to reduce the tax advantages of salary sacrifice but with a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, the suggestion is that changes to salary sacrifice could be considered as a potential revenue-raising measure.