The winners and losers from the salary sacrifice reforms
The UK government’s salary sacrifice reforms add complexity and do not address fundamental issues within the pension taxation system, the Institute for Fiscal Studies (IFS) has warned in a report.
The IFS’ report, Assessing the government’s reform to the National Insurance treatment of salary sacrifice pension contributions, which was published on the 13th May 2026, argues that the reforms do not solve the asymmetries in the tax system.
The report notes: “The fact that employer pension contributions are not eligible for [National Insurance Contributions] either at the point of contribution or in retirement is the biggest tax break for pensions in revenue terms. However, this tax break is opaque, unavailable for the self-employed, and creates a fundamental asymmetry with the NICs treatment of individual pension contributions.
“The reform does not address this asymmetry – it reduces one arbitrary distinction in the tax system (between salary sacrifice and employee pension contributions), while creating another (between employer and salary sacrifice pension contributions).”
When the Chancellor announced that salary sacrifice pension contributions above £2,000 per year will no longer be exempt from employer and employee national insurance contributions from 2029-30 onwards, it was unclear who would be affected by the change in tax treatment. The IFS’ report seeks to bridge this gap.
So who will lose out?
Higher earners
Higher earners are most likely to be affected by the changes to salary sacrifice, the IFS’ research found. Indeed, 48% of employees in the highest earning decile would be directly affected by the policy, compared with less than 1% of employees in the bottom fifth of the earnings distribution.
Mid-career workers
The reforms will also affect employees aged 30-59 more than workers who are younger than 30 or older than 60. People in the 30-59 age bracket are more likely to be saving into a pension and using salary sacrifice above £2,000 per year than other age groups.
Private sector employees
Over double – 18% – of private sector workers make salary sacrifice pension contributions of more than £2,000 per year, compared to only 7% of their public sector counterparts.
Therefore, the average yearly increase in employer NICs per private sector employee will be £151, compared to £37 in the public sector. The private sector accounts for around 93% of total additional employer NICs.
Employers with 5,000-9,999 employees
Large employers – but not the very largest – will be most affected by the reforms to salary sacrifice. Companies with 5,000-9,999 employees will face an average hike in NIC costs of £360 per employee. In addition, firms in finance, insurance, information and communications will be hardest hit, the IFS calculates.
Men
Men are more likely to make salary sacrifice contributions exceeding £2,000 than women, according to the IFS. The report reads: “This principally reflects the fact that women are more likely than men to be lower earners and are more likely to work in the public sector, and that these groups are less likely to be affected.”
The outcome of the reforms
“The policy will raise a significant amount of revenue from a minority of households,” the IFS’ report notes, adding that the reforms are highly progressive, targeting higher earners and the private sector as explained above.
How will employers and employees respond? That is still unclear. Employers with large numbers of affected employees may freeze or cut salaries, the IFS warns. Behavioural responses to the policy are unclear, which also makes it difficult to predict the impact on the government’s tax take.
The industry’s response
Catherine Foot, director of the Standard Life Centre for the Future of Retirement, observed: “This analysis shows that despite the changes to salary sacrifice being framed as targeting higher earners, the consequences are likely to ripple more widely through the pensions system with the private sector bearing the brunt of the proposed changes.
“What’s especially troubling is that this reform adds complexity and increases pension costs at a time when the provision is already falling short of the levels need to secure good retirement outcomes. With the Pensions Commission reconvened to address long‑term under‑saving, there is still an opportunity for government to step back and rethink how to create a fairer, simpler and more effective framework to support employers and employees to build adequate retirement savings.”
