HMRC Research Suggests Major Changes to Pension Salary Sacrifice Are Likely
HM Revenue & Customs (HMRC) has published research raising the prospect of changes to the way salary sacrifice arrangements for pensions are taxed and treated for National Insurance (NI) relief. The recent study, commissioned in 2023 and published in May 2025, explored employers’ attitudes toward three hypothetical reform scenarios: removing NI reliefs; removing both NI and income tax reliefs; and limiting reliefs above a specified threshold.
Employers involved expressed particular concern about the second scenario, describing it as the most damaging to the benefits of salary sacrifice. While the government has not committed to any of the options, commentary from experts suggests reforms are very likely to feature in an upcoming Budget. With significant changes to employer NI coming into effect from April 2025, the environment for these discussions is already shifting.
Background: HMRC’s Research into Pension Salary Sacrifice
- HMRC commissioned IFF Research in March 2023 to explore employer views and behaviours regarding pension salary sacrifice schemes.
- The research involved qualitative interviews between 30 May and 3 August 2023 of 41 employers who offer salary sacrifice for pensions and 10 employers who do not.
- The study was published on 27 May 2025.
What Salary Sacrifice Means and Why It Matters
Under a salary sacrifice pension arrangement, an employee agrees to reduce their salary in return for employer contributing an equivalent amount into their pension. This arrangement currently reduces both employer and employee’s NI liability, and reduces income tax for the employee. Employers report it is generally easy to explain and administer once established.
Three Hypothetical Scenarios Examined
HMRC’s research asked employers for their reaction to three hypothetical reform options altering tax/NI reliefs in pension salary sacrifice. These were:
ScenarioWhat is being removed/changed
- Scenario 1 Remove the NI exemption for both the employer and the employee on sacrificed pension contributions.
- Scenario 2 Remove the NI exemption for employer and employee, and remove the income tax exemption for employees on the sacrificed amount.
- Scenario 3 Remove the NI exemption only for contributions (employer and employee) above a £2,000 per year threshold.
Employers were most negative about Scenario 2, saying it could “wipe out the benefit” of salary sacrifice, and many questioned whether they would continue offering salary sacrifice for pensions under that model. Scenario 3 was the least disruptive in employers’ views, though concerns remained.
Verified Figures: Impacts for a £35,000 Salary
Because the research used a hypothetical example for someone earning £35,000 a year, sacrificing 5% of salary (i.e. £1,750) into pension via salary sacrifice, plus an employer 3% additional contribution, some quantified impacts can be drawn.
- In Scenario 1 (remove NI relief for both parties):
- Employee would pay approx. £210 more per year in NI than under baseline.
- Employer would pay about £242 more in employer NI contributions than under baseline.
- In Scenario 2 (remove NI relief + remove employee income tax relief):
- Employee could face approx. £560 extra (combined NI + income tax) annually under that scenario vs. baseline.
- Scenario 3 (thresholded NI removal above £2,000): smaller differences for many; employers considered it more viable.
Other Related Changes: Employer National Insurance and Cost Pressures
From 6 April 2025, the employer National Insurance rate (secondary Class 1) increased from 13.8% to 15%. Also, the threshold at which employer NI becomes payable (secondary threshold) dropped from £9,100 per year to £5,000 per year.
These changes increase operating costs for employers and amplify the importance of any reliefs they currently enjoy through salary sacrifice.
Stakeholders’ Views and Likely Outcomes
- Employers: Generally view current salary sacrifice pension arrangements favourably for retention, recruitment, employee satisfaction. But many are wary of changing reliefs. If they lose those benefits, there could be reduced uptake, disengagement, or even cessation of offering the scheme.
- Experts/commentators: Steve Webb (partner at LCP, former Pensions Minister) said that the fact HMRC has commissioned such research suggests a “significant risk” of cuts in the forthcoming Budget.
- Government / HMRC: No policy announcements yet. The research is exploratory/hypothetical; none of the scenarios has been adopted.
Final Summary
HMRC’s research, published in May 2025, provides strong evidence that reforms to pension salary sacrifice tax and NI reliefs are under serious consideration. Employers were presented with three scenarios:
Removing NI relief altogether; removing both NI and income tax reliefs; or removing NI relief only above a £2,000 sacrifice threshold. Of these, removing both tax and NI reliefs (Scenario 2) drew the most concern, as many employers believe it could negate the financial benefit that underpins salary sacrifice.
For an employee earning £35,000 and sacrificing 5% of salary, the potential extra cost under that scenario could reach approximately £560 a year. More modest changes, like Scenario 1 or Scenario 3, would still impose costs, though significantly lower ones.
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