Are the benefits of salary sacrifice for pension contributions about to be reduced?

However, the amount actually paid into the pension arrangement for that employee is the same. For instance, in a simple example, if the normal employee pension contribution is 5% (with a matching employer contribution of 5%) and the employee earns £4,000 (gross) per month the employee and employer would each pay £200 each month to the pension arrangement (the employer would normally collect this contribution as a deduction through the payroll).

The employee and employer both pay NI contributions on the £4,000 monthly income, although the employee is only assessed to income tax on £3,800, i.e. after allowing for the pension contribution.

However, if the employee agrees to sacrifice 5% of his pay, this would reduce their pay, for both tax and NI purposes, to £3,800. The employer would then pay £400 into the pension arrangement in respect of that employee but would only pay NI on the £3,800.

So, at the moment, both the employee and employer benefit from salary sacrifice.

The research just published was originally commissioned by the previous Government in 2023 and was carried out between March and July 2023, and involved consultation with 51 employers, 41 of whom offered salary sacrifice arrangements to their employees.

However, it has only just been published. There is no comment on why the research has only now been published.

The consultation asked a number of questions but also looked at three possible scenarios for changing the tax and NI advantages of salary sacrifice for some or all employees.

The research sought feedback on three options, as follows:

• Charging NI contributions on any sacrificed salary;
• Removing the current income tax exemption for employees on any salary sacrificed; and
• Only removing the exemption on salary sacrificed above a £2,000 threshold.

Not surprisingly, the second option received the least favourable response, and the third option was viewed most favourably – but with the caveat that any removal should be set at a higher level.

However, employers also expressed the view that any change would be likely to affect employee morale – with some employees may be forced to choose between reducing the amount of salary sacrificed and maintaining the same contribution and paying the extra tax.

Not surprisingly, employers also highlighted that any of the changes would add to employment costs.

Changes to salary sacrifice advantages have been mooted in the past – and at this point it should be noted that salary sacrifice is available in relation to many public sector pension arrangements. Any proposed change is therefore likely to meet resistance from both the private and the public sector.

In addition, any change to the salary sacrifice arrangements – even the most modest of the proposals set out above – is likely to affect the overall level of pension saving and/or affect the cost of providing pension arrangements for employees.

It is not surprising therefore, that most commentators view any changes negatively. No announcement of any change is expected until the Budget in the Autumn.