Salary sacrifice investigation bit.ly/4khiyZA about time. It is a benefit for middle class professionals to avoid NICs on pension contributions and tax and NICs on buying a bicycle, joining a gym, buying a car or home computer, childcare, store cards, laptops, mobiles etc
— Paul Lewis (@paullewismoney.bsky.social) May 27, 2025 at 8:40 PM
I looked at my Nest statement this weekend, no personal contributions – all comes from the company – AgeWage. I remember now- we opted for salary sacrifice and though I didn’t get a salary or a pension contribution, things are looking up for our enterprise.
Paul was yesterday, today I have a correspondent I rely on too much for payroll/pension issues. She knows more than anyone else and she sees trouble for payroll ahead.
So the next thing in the government sights’ appears to be salary sacrifice for pensions it was an obvious move with the increase in employer’s national insurance that more businesses, particularly SMEs, would be advised to move to salary sacrifice, of course the big guys have sensibly been doing it for years, but it looks like this document provides the support for some very complicated legislative changes to make employer pension contributions subject to employer national insurance (maybe after a de minimis which will also be complex) and potentially (one wonders) to corporation tax relief as well.
Gosh it’s a tough time to be an employer at the moment.
You have to be clever to make a sentence last as long as the first one! She and I are the kind of middle class people who like to avoid paying national insurance.
Here is someone who is too old to pay national insurance but whose brain is in its prime!
Given that Labour has backed itself into a corner on tax etc rates, it is inevitable it is scratching around for other ways to raise money.
HMT has lots of work and ready reckoners available to decision makers and the smart young lads and lasses who prepare briefing etc. Reams of analysis on each metric affecting each source of revenue and also each tax etc allowance.Salary sacrifice has always been an obvious target. And I suspect it could bring more with it, all of which have been around for ages. NI on pensions is such an obvious one. At least at the rate deemed allocated to the NHS. Or could become even wider. A revisiting of the social care contribution.We cannot get away much longer with not paying our way, one way or another. From my personal and friends experience, it seems more health care is privately funded. More social care too.
Here is the article that is causing all the fuss. It’s from the HMRC and the Treasury
HM Revenue and Customs (HMRC) commissioned IFF Research to undertake research to understand the experiences, motivations, and attitudes of employers towards using salary sacrifice arrangements for pensions. The research also explored whether hypothetical changes to tax reliefs (such as reform of NICs relief) on pension salary sacrifice arrangements may impact employers’ motivations and attitudes towards these arrangements.
Between 30 May to 3 August 2023, IFF Research conducted qualitative in-depth interviews with 41 businesses that offered a salary sacrifice arrangement for pension contributions and 10 businesses that did not. Businesses recruited for this research identified the person most suitable to take part in the interview on their pensions and salary sacrifice arrangements. Interviewees were predominantly in HR or finance roles.
The views in this report are the authors’ own and do not necessarily reflect those of HMRC.
So HMRC have sat on this paper since January2024 when NI rates were a lot lower. Here is the conclusion
The research revealed that the main motivation of employers for offering salary sacrifice for pensions was that it was generally seen as beneficial for both the employer and employees due to the NI savings for both parties.
This research found that there was a mixed response as to whether the NI savings resulted in more generous contributions. Most employers included in this research said they did not use the NI savings from the salary sacrifice arrangement to directly fund their workplace pension – the savings were absorbed into general business running costs, where pensions were one such cost. However, some employers said they used the NI savings from the salary sacrifice arrangement to contribute above the Automatic Enrolment minimum, passing these savings on to their employees in the form of higher contributions.
Generally, employers reported finding pensions salary sacrifice easy to explain to their employees. Most employers said they found salary sacrifice pensions easy to administer and manage, once set up. The fact that the employers included in this research had been offering salary sacrifice for pensions for a number of years likely impacted responses in relation to explaining it to employees and the administrative burden of managing it. When responding to questions on the hypothetical scenarios for salary sacrifice, employers commonly mentioned the administrative burden associated with getting to grips with any changes the scenarios could bring.
All the hypothetical scenarios explored in this research were viewed negatively by employers, but the extent to which they led to a reported definitive change in employer behaviour regarding pensions varied. It was common for employers to say they would need to consider the impact the changes would have and look into other options besides salary sacrifice for pensions, highlighting the challenge of asking hypothetical questions in real time. Initial responses and reactions to these questions often indicated some misunderstanding amongst employers of alternatives to salary sacrifice for pensions and pensions more broadly. Larger employers were more likely to not only recognise different pension options that were available, but some already offered multiple pension types, and so would be able to switch with less administrative burden. Contrastingly, smaller employers tended to be unsure of the alternatives available or prepared to consider the option of absorbing additional NI to avoid any administrative burden.
Generally, employers indicated that changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions.
The hypothetical alternatives to the current salary/bonus sacrifices are set out in the paper and I won’t set them out here. There is enough in the paper to justify the kind of action my correspondent foresees (having read the paper harder than me),
As David Fairs of LCP says on Linked in , HMRC would not be dragging this out of the cupboard now if there wasn’t a plan to do something about the amount being lost. VFM for the tax-payer? Well if you think like Paul Lewis and most working people the answer is “no”. If you are middle class and spend your time thinking about how to get around paying national insurance then salary/bonus sacrifice is most definitely a “good thing”,
If you were Rachel Reeves would you follow the middle class professionals or the lower class worker?
Is the saving worth the disruption to payroll and annoyance to middle-class professionals?
Salary sacrifice for pension savers could be as divisive as winter fuel payments for pensioners.
Salary sacrifice has some interesting implications for employees and employers alike. One benefit (for those who don’t really need the pension) is that employees can still get tax relief on “their” pension contributions over the age of 75, as these become employer contributions. The other implication is that they may have to scale back those contributions so that their remaining pay doesn’t fall below Minimum Wage. It is the employer that needs to calculate just how much pay can be sacrificed to pension contributions.
One function of an adviser is to maximize benefits at the right risk tolernece applicatble tot he client. SAlary sacrifice is just a way of contributing and a no brainer for most. Hwoever there are already enough hurdles to navigate. See an example below: Reformating an old template with the help of AI.
MEMORANDUM
TO: All Staff
FROM: HR Department
DATE: May 28, 2025
RE: Salary Sacrifice and Pension Contributions – Key Points
Executive Summary
This memo outlines the key considerations for salary sacrifice arrangements, particularly in relation to pension contributions. Salary sacrifice allows employees to give up part of their cash remuneration in exchange for non-cash benefits, typically resulting in tax and National Insurance savings.
What is Salary Sacrifice?
Salary sacrifice occurs when an employee voluntarily gives up the right to part of their cash remuneration under their employment contract. The sacrifice is usually made in return for the employer providing a non-cash benefit, such as a pension contribution.
Example: Mr Smith’s current contract provides £40,000 annual cash remuneration with no benefits. He agrees with his employer that going forward, he will receive £35,000 cash remuneration with £5,000 paid annually as an employer pension contribution on his behalf.
Benefits of Salary Sacrifice
When carried out correctly, salary sacrifice arrangements offer several advantages:
The employee is not taxed on the “sacrificed” remuneration
The contribution is treated as an employer’s contribution for all purposes
Subject to normal relief rules for employer contributions
Does not count toward the maximum relievable employee contribution limit
Note: NIC advantages were removed from 6 April 2017, except for ultra-low emission cars, pensions, childcare, and cycle-to-work schemes
Requirements for Effective Salary Sacrifice
Timing Requirements
The sacrifice must be agreed before the remuneration is treated as received for employment income purposes. This means:
For employees: Before the earliest of payment date or entitlement date
For company directors: Additional dates apply including when remuneration is credited in company accounts
Practical Implementation
Example: Mrs Smith earns £48,000 annually, paid as £4,000 on the 25th of each month. She wishes to sacrifice £6,000 for pension contributions. If she makes the agreement on 3 February 2025, she will receive reduced monthly salary of £3,500 from 25 February 2025 onwards. The sacrifice cannot be backdated to previously received salaries.
Bonus Sacrifice Examples
Contractual Bonus
Example: Mr Smith is contractually entitled to an annual bonus based on company profits. The company year-end is 31 January, with accounts finalized by 31 July 2024 and bonus payment due 31 October 2024. On 31 August 2024, he’s informed the bonus will be £10,000.
He can choose between:
Receiving the £10,000 bonus, or
Sacrificing the bonus for a £10,690 employer pension contribution (includes 50% of employer’s NIC saving)
If he chooses sacrifice and completes documentation by 30 September 2024, this is successful because the bonus wasn’t yet “received” for employment income purposes.
Discretionary Bonus
Example: Mrs Smith’s employer decides to reward her excellent performance with a large bonus. Instead of paying the bonus directly, they can contribute an equivalent amount to her pension scheme without formal salary sacrifice documentation, provided this is done before the bonus is paid.
Documentation Requirements
Sample Salary Sacrifice Wording
Option A – Direct Notification:
“Please note that with effect from [date] your basic salary is reduced by [amount] from [original amount] to [new amount]. The sum of [sacrificed amount] is to be paid into a pension scheme for your benefit upon retirement.”
Option B – Offer Format:
“You are being offered the option of sacrificing an element of your contractual pay in exchange for a pension contribution. If you agree, with effect from [date 1] your basic salary will be reduced by [amount] from [original amount] to [new amount]. You can indicate your agreement by signing and returning this letter by no later than [date 2].”
Bonus Sacrifice Wording
“You are due to receive a bonus of [amount] on [date 1]. You have the option to receive this as cash or give up your contractual right in exchange for a pension contribution of [amount]. Please indicate your decision by signing and returning this letter by no later than [date 2].”
Use of “Notional Salary”
HMRC acknowledges that the pre-sacrifice salary level may continue to be referenced for:
Determining pay increases
Calculating overtime rates
Working out holiday pay or sick pay entitlements
Determining pensionable pay under defined benefit schemes
This reference to “notional salary” does not invalidate the salary sacrifice arrangement.
Important Considerations
Legal Implications
Salary sacrifice is a legal contract variation
Cannot revert to original salary without employer consent
Must not be revocable by the employee
Impact on Other Benefits
Mortgage applications: May affect lending amounts (varies by lender)
Income protection: Lower salary may reduce benefit levels
Life assurance: Some employers base benefits on notional salary
Occupational pensions: Check scheme rules for impact on pensionable salary
State Benefits
Many state benefits are based on earnings and NIC history
Salary cannot be reduced below minimum wage
Potential impact mainly affects part-time workers below Lower Earnings Limit
Pension Access
Benefits typically not available until age 55 (57 from 6 April 2028)
Consider recycling anti-avoidance rules for substantial sacrifices near retirement
HMRC Compliance
No requirement to inform HMRC of arrangements
Employers can request confirmation of correct tax treatment from local HMRC office
HMRC will not comment on proposed documentation but will verify implemented arrangements
For further information or to discuss salary sacrifice options, please contact the HR Department or your Financeia Adviser.
It will be interesting to see how they propose to deal with NICs and Salary Exchange. If they simply decide to put NICs on Employer Contributions, then this will hit all sorts of schemes including non-contributory DC, funded DB and unfunded DB.
The carnage would be something to behold
There are a number of ways of dealing with these situations which are spelt out at great length in the document HMRC commissioned. My correspondent neatly explains
“but it looks like this document provides the support for some very complicated legislative changes to make employer pension contributions subject to employer national insurance (maybe after a de minimis which will also be complex) and potentially (one wonders) to corporation tax relief as well.”