There could be changes to salary sacrifice for workplace pensions, former pensions minister Sir Steve Webb has warned after HMRC today published new research around ‘hypothetical’ cuts to salary sacrifice.

Sir Steve, partner at pension consultancy LCP, said: “The research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.”

He said that with the Government reportedly desperately short of cash, the chances of changes to salary sacrifice for pensions now look much greater than might have previously been thought.

The research commissioned by HMRC asked questions about attitudes to salary sacrifice as it currently stands, as well as testing employer reaction to three different ways in which the benefit could be hypothetically cut back.

Under current salary sacrifice agreements between employers and employees, staff agree to take a lower salary, saving themselves and their employers national insurance, in return for more of their earnings shifted into their pensions.

The fieldwork was undertaken in May-August 2023 and involved interviews with 51 firms, 41 of which offered salary sacrifice and 10 of which did not.

The research has only just been published under the title “Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions.”

The research showed employers were positive about salary sacrifice and thought it helped to retain employees as part of the overall benefits package.

Some said they passed on the employer NI saving to their employees, but for others it was simply absorbed by the firm as a reduced employment cost.

The three hypothetical reforms tested were:

• Removing the NI exemption for employers and employees, resulting in employer and employee NI charges on the salary that the employee sacrificed.
• Removing the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed.
• Removing the NI exemption but only on salary sacrificed above a £2,000 per year threshold.

Employers were most negative about the second option, which involved removing both NI and tax breaks for salary sacrifice. Some employers said that would eliminate the benefit of operating salary sacrifice and were unsure that they would continue to operate salary sacrifice for pensions in that scenario. 

The most favourably viewed reform was one where salary sacrifice would be capped but allowed for smaller amounts of sacrificed salary.

Mr Webb said: “It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back. 

“Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today.”