Techzone

The recent rise in employer NI, from 13.8% to 15% since 6 April, has fuelled a surge of interest in salary sacrifice. Enquiries from employers have seen a significant uptick in the last year.

Salary sacrifice isn't exclusive to workplace pensions. Contributions can be made into any pension scheme including into the employees own SIPP arrangement. This can be a great way to bring all of a client's assets under advice, making reviews easier.

It seems HMRC have taken an interest in salary sacrifice following the publication of research in this area in May. The research looks at potential future changes to the taxation of salary sacrifice arrangements, although it is uncertain if, or when, any of these options will be introduced and whether any change may be retrospective.

What is salary sacrifice?

Salary sacrifice is a way for employers to improve the benefits on offer to employees by boosting their retirement savings. This is achieved by giving up pay under a contractual agreement in exchange for an employer pension contribution. The primary advantage for salary sacrifice is the employee and employer National Insurance (NI) savings on the salary sacrificed. Some employers may pass on some, or all, of their NI savings as an incentive to employees. Employers are not obliged to offer salary sacrifice arrangements.

Salary sacrifice into a SIPP

Salary sacrifice into a SIPP could be a very attractive option for employed business owners, company directors and even higher earning employees wishing to make additional savings on top of their employer's scheme. They may even want to opt-out of the employer scheme if the employer agrees to divert their contribution to their chosen SIPP. Employees simply need to ask their employer to direct the payments into their chosen SIPP. The employer can approve or decline the request. If they agree to the arrangement they will need the relevant payment details of the receiving SIPP.

Making an additional contribution via salary sacrifice into a SIPP will offer greater investment choice and freedom, access to discretionary fund managers, a contract that is "retirement ready" for those wishing to use flexi-access drawdown, as well as ongoing advice and reviews with their financial adviser.

Disadvantages of salary sacrifice

Whilst salary sacrifice offers clear financial incentives for both employer and employee, there are some disadvantages which need to be carefully considered-

• As the arrangement is contractual, the employer would have to agree to any changes to the salary sacrificed. This may be limited to only making changes at the start of the business year or at a significant life event.
• The employee's ability to borrow could be limited to their reduced salary
• Other employment benefits such as death in service or PHI could be based on the reduced salary
• Entitlement to earnings related state benefits, such as statutory maternity pay, statutory sick pay, means tested benefits, tax credits and state pension accrual could be affected by the reduced salary
• There could be an impact on the calculation of threshold income for a tapered annual allowance calculation

HMRC research on salary sacrifice

On 27 May 2025, HMRC published research on salary sacrifice for pensions that was undertaken in 2023, suggesting that these arrangements could be under the spotlight for review.

The research looked at employer mindsets towards salary sacrifice and their views on three hypothetical scenarios, each with a different tax treatment of salary sacrifice arrangements.

1. Removing the NI relief for employer and employee salary sacrificed pension contributions
2. Removing the NI relief for employer and employee salary sacrificed contributions and removing the income tax exemption for employees on the salary sacrificed
3. Removing the NI relief for employer and employee salary sacrificed contributions above a £2,000 annual threshold

Going back to the example of Jessica, sacrificing £25,140 of her £125,140 pay, the three scenarios would have the following effect:

The hypothetical scenarios were generally met with negative responses, with employers outlining the effect on employee morale, the administrative burden and how it could change their pension offering in the future.

Without the NI savings, Scenario 1 would put both the employee and the employer in the same position as making the pension contribution under either a net pay or a relief at source scheme.

Option 2 was met with the most negativity; effectively rendering salary sacrifice redundant as it becomes a more expensive option for both employees and employers than a net pay scheme. Option 3 was the most favourable of the scenarios, although employers still highlighted the additional operational costs of operating a tiered system.

What's next for salary sacrifice?

Salary sacrifice can affect the tapered annual allowance calculation. New salary sacrifice arrangements started after 8 July 2015 are included in the calculation for threshold income. Arrangements in place prior to this date were not affected. If new legislation around salary sacrifice NI and tax relief was introduced, the government could perhaps take a similar approach and introduce it for new salary sacrifice arrangements set up after a particular date.

This is no guarantee, however, that any new legislation would not be retrospective. The publication of this research may be an indication of changes ahead. Only time will tell if they ever come to fruition.

You can find more details on this subject in our Techzone guide, Salary sacrifice and pensions.