Steve Webb shares his reaction to latest Government research published today and commissioned by HMRC entitled “Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions”.
As well as asking general questions about attitudes to salary sacrifice as it currently stands, the research tested employer reaction to three different ways in which the benefit could be ‘hypothetically’ cut back. 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, but it has only just been published.
With regard to the current system, 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.
In terms of potential changes to the system, 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
Perhaps not surprisingly, employers were most negative about the second option, which involved removing both NI and tax breaks for salary sacrifice. 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. The most favourably viewed reform was one where salary sacrifice would be capped, but allowed for smaller amounts of sacrificed salary.
The fact that HMRC has commissioned research to test employer responses to potential changes to salary sacrifice suggests that there remains a significant risk of cuts in the forthcoming Budget.
Commenting, Steve Webb, partner at pension consultants LCP 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. With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure”.
