In late May, HMRC published a report – based on data collected in summer 2023 and dated January 2024 – that had been held back for months. Why the delay?
HMRC are not renowned for prompt action, except for issuing reminders in early April to complete a tax return. So eyebrows were raised when research commissioned in March 2023, carried out between May and August of that year, was suddenly published in late May 2025. The subject of the investigation, entitled ‘Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions’, set a few next-Budget hares running.
At its simplest, salary sacrifice involves an employee giving up (sacrificing) part of their pay and their employer applying the foregone pay as a pension contribution. The employee still benefits from income tax relief on the pension contribution by not paying tax on the sacrificed pay. In addition, the approach has two benefits over a straightforward employee contribution:
- For the employee: There is a saving in national insurance contributions (NICs) on the amount sacrificed. Broadly speaking, for basic rate taxpayers, the saving is £8 per £100 of pre-tax relief contribution, and for higher and additional rate taxpayers, £2 per £100.
- For the employer: The saving in NICs is generally much larger at £15 per £100 of gross pension contribution. This is a higher figure now than when the research was undertaken, thanks to the controversial April 2025 increase to employer’s NICs.
The report found that “Most employers said they did not use the NI savings from the salary sacrifice arrangement to directly fund their workplace pension”, implying that they were the main financial winners of salary sacrifice. However, the survey was small – only 41 employers operating salary sacrifice were involved, with ten more that did not – and many employers do use some of the NICs to boost sacrificed pension contributions.
Part of the research outlined three scenarios of changed arrangements, which would make salary sacrifice less attractive, and measured reactions. All of them involved removing some or all of the employer and/or employee NIC reliefs. Unsurprisingly, none of the trio received a warm reception, particularly the variant that removed all NICs savings (employer and employee) and employee income tax exemption, prompting some employers to say that such changes would prompt them to end their salary sacrifice schemes.
The publication’s timing may just have been happenstance, but if you are considering salary sacrifice for pension contributions, regardless of potential changes, ensure you fully understand all the ramifications before making a decision.
The value of your investment and any income from it can go down as well as up and you may not get back the full amount you invested.
Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.
The information contained within this article is for guidance only and does not constitute individual financial advice.
Content correct at time of writing.