New government research on salary sacrifice for pensions

In May 2025, HMRC published new research exploring how employers across the UK feel about salary sacrifice for pensions and what they’d do if the tax or National Insurance (NI) benefits changed.

HMRC and IFF Research carried out in-depth interviews with 51 employers (41 using salary sacrifice, 10 not) to better understand:

• Why employers choose to offer or avoid salary sacrifice schemes.
• How they administer these schemes in practice.
• What barriers exist to wider adoption of schemes.
• How employers might react if NI or income tax reliefs on salary sacrifice were reduced or removed.

The aim is to help the government assess the current system’s effectiveness and decide whether changes to tax or NI treatment of salary sacrifice are needed. Here, we outline their findings and consider what this could mean for the future of salary sacrifice.

How the research was conducted

Between May and August 2023, HMRC commissioned IFF Research to conduct 51 in-depth qualitative interviews with employers across the UK. This included 41 employers already offering salary sacrifice for pensions, and 10 that did not. The participants ranged from micro employers to large corporations spanning multiple sectors, and the interviews were conducted with staff responsible for payroll, pensions, or finance.

The researchers also explored employer responses to three hypothetical scenarios that could change the financial attractiveness of salary sacrifice for pensions:

• Hypothetical 1: Complete removal of NI relief, meaning salary sacrifice would no longer reduce NI liabilities.
• Hypothetical 2: Removal of NI for both employers and employees, and income tax relief for employees, ending all current tax advantages.
• Hypothetical 3: Capping NI relief at the first £2,000 of salary sacrificed, limiting potential savings for higher earners or those making large contributions.

The report states that these scenarios were designed to test how sensitive employer decisions are to potential tax or policy changes.

What the research found

The research revealed that for employers already offering salary sacrifice, the primary motivation was the significant National Insurance savings it delivers to both employers and employees. Many saw salary sacrifice as a tax-efficient way to enhance pension savings, attract new talent, and retain existing staff, particularly at a time when financial wellbeing is a growing priority.

Ease of implementation

Most employers described the initial setup process as the main challenge, citing the importance of checking minimum wage compliance and updating payroll systems. However, once salary sacrifice schemes were in place, employers generally found them straightforward to administer, especially when supported by payroll software or third-party pension providers. The complexity of the initial implementation was therefore outweighed by the ongoing ease of management.

Employee engagement

Employee engagement emerged as another clear theme. Employers reported high levels of uptake when schemes were well-communicated, with some organisations even choosing to enrol employees automatically into salary sacrifice arrangements, giving staff the option to opt out if they wished.

By contrast, employers who did not offer salary sacrifice typically pointed to concerns about administrative complexity, the perception that it offered limited benefits for smaller workforces, or simply a lack of employee demand.

Use of NI savings

Employers varied in how they used the National Insurance savings generated through salary sacrifice. Some chose to reinvest the savings directly into employees’ pension pots, boosting contributions above statutory minimums and strengthening their overall benefits offering. Others retained the savings within their general operating budgets, using them to offset other business costs.

Reactions to hypothetical policy changes

Finally, the research explored employer reactions to three hypothetical policy changes. When asked how they would respond if National Insurance relief on salary sacrifice were removed entirely, many employers indicated they would reconsider or withdraw their schemes, as the financial incentive would largely disappear.

The prospect of removing both National Insurance and income tax reliefs was viewed even more negatively, with most employers saying this would effectively make salary sacrifice unviable.

A third scenario, limiting National Insurance relief to the first £2,000 of salary sacrificed, received mixed responses: some employers felt it would still offer meaningful benefits for lower earners, while others raised concerns about added complexity and potential perceptions of unfairness.

The outcome

Taken together, these findings demonstrate that salary sacrifice remains a popular and effective tool for supporting employee pension savings, but it’s also highly sensitive to the current system of tax and National Insurance incentives. Any changes to these reliefs could significantly alter employer and employee participation, with potential implications for retirement outcomes and overall employee satisfaction.

What this might mean for the future

Policy risks ahead

The research makes it clear that salary sacrifice for pensions is popular but heavily reliant on tax and National Insurance reliefs. Given ongoing fiscal pressures, these reliefs could be reviewed in future budgets, which might affect the viability of salary sacrifice schemes.

Implications for payroll teams

Payroll professionals should stay alert for policy changes that could require quick updates to payroll systems, recalculations of net pay, and scheme redesigns. Preparing for potential scenarios will help minimise disruption.

Importance of communication

Clear communication remains essential. The research showed that employees engage better when salary sacrifice benefits are well explained. If changes occur, employers will need to inform staff promptly, so they understand how any adjustments impact their pay and pensions.

Continued compliance focus

Payroll teams must keep salary sacrifice arrangements compliant with minimum wage laws. The report highlighted that minimum wage checks are a common challenge, requiring regular monitoring to avoid unintentional breaches.

Supporting financial wellbeing

Regardless of potential policy changes, salary sacrifice can still play a valuable role in supporting employee financial wellbeing. Helping staff save for retirement remains a powerful tool for boosting engagement and retention, especially during cost-of-living pressures.

Final thoughts

Salary sacrifice for pensions continues to offer clear benefits for both employers and employees, but future changes to tax or National Insurance relief could have significant implications.

We recommend payroll teams keep a close eye on government announcements and budget updates, review their current schemes for compliance, and prepare clear communications to support employees if changes arise. Staying proactive will help your organisation adapt smoothly and continue to support your staff’s financial wellbeing.