What is salary sacrifice and why’s it under threat?

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If you read Jo Cumbo’s piece on possible changes to pensions tax relief in the FT yesterday, you’ll have seen references to the abolition of pension salary sacrifice.

Pension Salary Sacrifice is quite legal and both the DWP and HMRC offer detailed guidance on how employers can save substantial amounts by allowing employees to exchange salary for extra pension contributions.

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As the payment of  salary leads to national insurance payments (by employer and employee) and as pension contributions don’t. There is good reason for employees to swap. And they are persuasively marketed…

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The Treasury is very coy about publishing figures showing how much national insurance is being lost as a result of pension salary sacrifice. Part of this may be because national insurance is income hypothecated to pay for the benefits offered by the DWP and the two departments are supposed to be at arms length.

National Insurance is officially not a tax. But the Treasury has long regarded national insurance as the “tax that dare not speak its name”and they are quite happy to stealthily adjust (e.g. increase) national insurance in lieu of increasing income tax. We might regard national insurance as a stealth tax.


Avoiding paying national insurance through salary sacrifice/exchange is not complicated – but it requires employers to be careful on a number of fronts;

  • they have to make sure employees know the implications of paying less national insurance
  • similarly they have to point out that (for credit purposes) they may be seen to be earning less – if they show a lower salary
  • they have to avoid sacrificing low-paid employees below the minimum wage
  • they have to follow a recognised process which gives the employees the option not to opt in to salary sacrifice.

I’ve written lots on the pros and cons, most pertinently in Accounting Web

As my articles keep banging on about, salary sacrifice is an endeavour not to be taken on lightly. Indeed it is very popular with larger employers with the means to profit from it and the resource to implement and manage it, and not very popular with small firms without these advantages.

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Which is very much “red rag to a bull” to the Government’s small business agenda. If it were possible to put small and large businesses on the same footing and increase the tax  (sorry) national insurance take, then this would be a “170 finish” with the final dart hitting the bull!


Without a “whingeing Webb” to stop him, and with the new pension minister “upstairs” and out of the way, now is the time for the devious Chancellor to strike – or so the conspiracy theory goes.

As the Treasury will not tell us how much it (sorry) the DWP is losing from salary  sacrifice, we don’t know what kind of a windfall could be achieved by banning the practice. Which is quite handy for a Chancellor engaged in a pensions three card trick (as speculated on by the FT).

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In the whole game of pacifying the various factions involved with changing pensions, national insurance (and especially salary sacrifice) is the joker (as well as the 170 finish). For the really important benefit for those who are most vulnerable (the lowly pensioned) is a benefit funded entirely by national insurance.

The national insurance fund – a theoretical pot of money managed by the DWP and measured by the Treasury (the Government Actuary) is going bust. It will be bust by 2020 unless the Government can manage its liabilities (e.g .unpick the triple lock) or increase National Insurance contributions.

I think it politically impossible for the opposition to argue against the diminishment or even the abolition of salary sacrifice.

But what of employers? The Federation of small businesses may not be overly bothered (see above- this is a big company perk) but the CBI should be very worried. Pension costs for large employers would increase in real terms by anything up to 10% (where the employee contribution represents the majority of what’s paid to “Workie”.

The fragile alliance between employer and Government has been kept in place by the tacit acceptance of this nice little earner for employers.

But what’s coming over the hill – is most certainly a monster. Whatever the Chancellor hits employers with, when he makes his announcements on changes to tax relief on March 16th, will make the loss of salary sacrifice appear an afterthought.

I suspect that March 16th is a very handy time to lose bad news. Any investigative journalist reading this report (or the PLSA), might want to file a request for information on how much is currently being lost to the “national insurance fund” from pension salary sacrifice.

It might be a number that could prove handy in the weeks following the budget.

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About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to What is salary sacrifice and why’s it under threat?

  1. Geoff Sharpe says:

    Once again Money Purchase under attack when every penny is needed to match the generous Defined Benefit schemes enjoyed by the Public Sector and other fortunates. What about non contributory Final Salary schemes, they are Salary Sacrifice by another name, I remember when I worked for the Coop Bank and they told us we would pay less NI by converting to a COFS. Many small firms are struggling to cope with auro enrolment, this is at least one way of softening the blow and perhaps saving jobs.

    If we add the reduced LTA, Annual Allowance and proposed cuts to tax relief for higher earners the Chancellor is showing his true colours, balance the books at any cost during this parliament, get the keys to Number 10, then set up for life.

  2. Brian Gannon says:

    I agree with Geoff. Taken in isolation you might be able to tolerate certain of George’s pension changes, but taken together this could lead to the destruction of all the good work done with pension freedoms. Possibly the most self-serving Chancellor who ever lived, indeed possibly the most self-serving politician who ever got elected (George Osborne not Geoff!).

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