Scrapping salary sacrifice could cut take-home pay for staff, SPP warns

The trade body has written to all 650 members of parliament to highlight the potential risks of reducing or removing salary sacrifice schemes used for pension contributions.

In a report published today (6 November), the SPP said recent research published by HM Revenue & Customs (HMRC) into salary sacrifice arrangements had sparked speculation that the government may be considering reforms to, or even the abolition of, salary sacrifice in an effort to increase tax receipts.

“[Changing salary sacrifice rules] would represent a sizeable cost to employers and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”

Steve Hitchiner, SPP

Salary sacrifice is often used as a more tax-efficient way of providing employee benefits such as pension contributions. It garnered attention late last year as a potential way of offsetting the increase in national insurance contributions announced in last year’s Budget.

However, HMRC then published research in May this year, based on a 2023 survey of employers, which former pensions minister Steve Webb said could mean that “changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure”.

The SPP emphasised that any move to restrict or remove salary sacrifice for pensions contributions could significantly impact both employees and employers, reducing net pay and undermining incentives to save for retirement.

SPP highlights ‘positive investment’ from salary sacrifice

Steve Hitchiner, chair of the SPP’s tax group, said: “Changing salary sacrifice arrangements would lead to a reduction in take-home pay for millions of employees who are saving into a workplace pension, with the greatest impact for those earning less than £50,284 a year.

“It would also represent another sizeable cost to employers, despite the chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”

“Any speculation about changes to pension taxation risks worries among pension savers and weakening faith in pensions as a way to save for retirement.”

John Wilson, Aptia

The SPP said around a third of private sector employees and 10% of public sector workers currently make use of salary sacrifice arrangements. While there was a £4bn cost to the government in providing salary sacrifice arrangements, the organisation said there was also “widespread recognition that this is a positive investment that incentivises pension saving”.

John Wilson, head of pensions technical at Aptia and co-author of the SPP’s report, said: “Salary sacrifice is one of the most effective ways for employees to boost their pension savings without reducing their take-home pay. It’s a win-win – helping people save for their retirement while making the most of available tax and national insurance efficiencies.

“This paper highlights the serious repercussions that any changes to salary sacrifice in the upcoming Budget could have, including reduced take-home pay for millions of employees and a significant cost burden for employers. It’s a timely and important warning that the chancellor cannot afford to ignore.

“Any speculation about changes to pension taxation risks worries among pension savers and weakening faith in pensions as a way to save for retirement. With three weeks to go until the Budget, we would call for speculation to be kept to a minimum.”