HMRC is exploring a review into the salary sacrifice schemes which allow employees to exchange part of their salary for pension contributions, reducing the amount of income tax and national insurance (NI) they pay.
The Government says that suggestions the changes are being considered are “speculative,” but experts warn that if implemented, they could leave the average employee paying over £500 more in tax and NI each year.
So, what exactly could change and how are experts responding to the proposed shake-up?
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In the UK, this means that instead of receiving the full salary in cash, a portion is redirected directly into a workplace pension scheme.
Employers also benefit by saving on their NI payments, making it a popular option for many companies and workers.
What are the proposals and who would they hit the hardest?
On Tuesday, the Government published research commissioned by HMRC testing employer reaction to three different ways in which the benefit could be “hypothetically” cut back.
The fieldwork was undertaken between May and August 2023 and involved interviews with 51 firms, 41 of which offered salary sacrifice and 10 of which did not.
Here are the three ways they could switch things up:
Income tax and NI relief removed
Under this proposal, income tax and NI relief would be removed. So, someone earning £35,000 a year and paying 5 per cent into their pension would lose £560 a year in total, while it would cost their employer £241 more.
Removing NI relief
This option proposed looks at removing only NI relief, costing the employee £210 and their employer £241.
Removing NI relief above £2,000 a year threshold
In the third option, where NI relief would be removed on any amount sacrificed over £2,000, the report said someone earning £45,000 would lose £30 a year and employers would spend another £34.
They are also likely to be unpopular with the wealthier members of the public after a series of raids on inheritance tax, capital gains tax and VAT on private schools.
“It would remove one of the few levers available to mitigate abrupt tax penalties, leaving households potentially worse off for earning slightly more.”
He said: “Some employers said that this would eliminate the benefit of operating salary sacrifice and were unsure that they would continue to operate salary sacrifice for pensions in that scenario.”
Why do they want to make these changes and what would they mean?
Sir Steve said Rachel Reeves is reportedly looking to “make up a multibillion-pound hole in the public finances” in her autumn Budget.
Gary Smith, financial planning partner at Evelyn Partners, said salary sacrifice isn’t new as a target for public expenditure savings.
Mr Smith explained: “After the Chancellor’s Budget statement, when she announced an increase to employers’ NI from April 2025, salary sacrifice arrangements for workplace pension schemes became more attractive for many employers, because of potential NI savings.
On potential savings, for those facing big tax jumps, like at £100,000 earnings, “the fault there lies with a poorly structured income tax and benefits system that penalises people for increasing their earnings,” he told The i Paper.
A Government spokesperson said: “These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system.
”We are committed to keeping taxes for working people as low as possible which is why, at last autumn’s Budget, we protected working people’s payslips and kept our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT.”
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