Research and analysis

Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions

Published 27 May 2025

Prepared by IFF Research for HM Revenue and Customs

Sarah Howell, Rob Warren (IFF Research)

Research report number: 753

January 2024

The views in this report are the author’s own and do not necessarily reflect those of HM Revenue and Customs

Glossary

Additional Voluntary Contributions (AVCs)	Additional voluntary contributions (AVCs) are contributions that you can make in addition to your normal contributions to an occupational pension scheme to increase your retirement benefits.
Annual Allowance (AA)	The Annual Allowance (AA) is the maximum amount an individual can save towards their pension in a tax year (6 April to 5 April) tax-free. When this research was conducted, the standard AA is set to £60,000 per year. If an individual uses all their annual allowance for the current tax year, they may be able to carry over any annual allowance they did not use from the previous 3 tax years.
Automatic Enrolment (AE)	Introduced in 2012, Automatic Enrolment (AE) is legislation which requires all employers to automatically enrol qualifying workers into and contribute towards a workplace pension scheme. Employees have the right to opt out after 1 month or cease saving at any time. Since April 2019, employers are required to contribute a minimum of 3% of qualifying earnings into their employees’ pension scheme, with employees contributing 5% of qualifying earnings (which includes income tax relief), bringing the total minimum contribution to 8%. Qualifying employees must fit all the qualifying criteria: they are classed as a ‘worker’, they are aged between 22 and State Pension age, they earn at least £10,000 per year in the same job and they usually work in the UK
Baseline	The term ‘baseline’ is used in this report to refer to an illustrative example of pension salary sacrifice. In the baseline approach, the employee has a yearly salary of £35,000 and contributes 5% (£1,750) of their salary into their pension via a salary sacrifice arrangement. The employer contributes 3% to the pension. The tax charges referenced in the baseline and other hypothetical scenarios were relevant at the time of interviewing.
Contribution flexibility	The ability to vary the level of contributions made into a pension scheme above the default individual contribution level of the workplace pension scheme, across varying periods such as months or years.
Defined benefit (DB)	Defined benefit (DB) pension schemes are a type of private pension scheme provided by employers where the amount accumulated is dependent on the scheme rules, rather than on investment or how much has been paid in. DB schemes are usually based on a number of things, for example salary and how long an employee has worked for their employer. The pension provider will guarantee a certain amount each year when the employee retires.
Defined contribution (DC)	Defined contribution (DC) pension schemes are private pension schemes where money from individual and employer contributions is put into investments (such as shares) by the pension provider. The value of the pension pot can go up or down depending on how the investments perform.
Lifetime Allowance (LTA)	The Lifetime Allowance (LTA) tax charge is the maximum amount of pension savings that someone can accumulate without paying additional tax. When this research was conducted, the LTA charge had been disapplied for the tax year 2023 to 2024, and would be removed altogether for the following tax year (2024 to 2025). The limit applies to all of an individual’s pension schemes. Should the LTA be breached, a tax charge of either 25% or 55% applies to the excess (depending on how it is withdrawn). The tax charge only applied when an individual claimed benefits, transferred abroad or reached the age of 75.
National Insurance contributions (NI)	National Insurance contributions (NI) are made by individuals in order to receive certain UK benefits and the UK State Pension. Employees and self-employed individuals aged over 16 pay a proportion of their earnings or self-employed profits on earnings over £242 a week and profits over £12,570 a year. When this research was conducted, the National Insurance rate was 12% for weekly earnings between £242 to £967 and 2% for earnings above £967. Employers also make a contribution on behalf of their employees.
National Minimum Wage	The National Minimum Wage is the minimum pay per hour almost all workers are entitled to.
Nest	Nest is the workplace pension scheme set up by the government. It is free for employers.
Net pay arrangements	A net pay arrangement is one way an individual can receive tax relief on their pension contributions. In a net pay arrangement, employee pension contributions are made before Income Tax is deducted from their pay. The employee will only pay tax on their remaining salary, meaning they receive tax relief on their employee pension contribution, at their marginal rate (whether they pay tax at the basic, higher or additional tax rate), providing they are in fact a taxpayer. The government will pay a top-up to low earners making contributions to pension schemes using a net pay arrangement in the tax year 2024 to 2025 onwards. The contribution amount will be shown as a deduction on an employee’s payslip. This is the full amount of the employee contributions for that period.
Optional Remuneration Arrangements (“OpRAs”)	An arrangement where the employee gives up the right, or the future right, to salary (known as salary sacrifice) or the right to some other form of cash pay , in return for a benefit-in-kind.
Optional Remuneration Arrangement Rules (“OpRA”) rules	Introduced in 2017, the OpRA rules remove the tax and NI advantages of salary sacrifice and optional remuneration arrangements more widely. The rules apply a tax charge to the higher of the benefit value or the salary foregone. A small number of benefits-in-kind are exempt from these rules, including employer pension contributions.
Opt-out of pension scheme	Employees are automatically enrolled (AE) into a workplace pension scheme. Employees can ‘opt-out’ within 1 month of being automatically enrolled, and receive back all contributions they have made, but not their employer’s contributions. If they cease contributing after the 1-month period, they and their employer’s contributions remain invested in the pension scheme.
Qualifying earnings	The earnings which minimum required AE pension contributions are based on. AE minimum rates are controlled by the government. When this research was conducted, the AE minimum rates applied to earnings between £6,240 and £50,270.
Relief at Source	Relief at source is one way an individual can receive tax relief on their pension contributions. In a relief at source arrangement, employee pension contributions are made after taking Income Tax and National Insurance contributions (NI) from their pay. Regardless of earnings, the pension provider then requests tax relief at the basic tax rate from HMRC and adds this to individuals’ pension pots. With relief at source, the amount an employee sees on their payslip is their contribution, but in fact the amount added to their pension will include the basic rate of tax relief (20%) as well. Higher rate taxpayers must then claim back additional amounts of tax relief owed from HMRC.
Salary sacrifice	A type of Optional Remuneration Arrangement whereby an employee agrees to give up part of their pre-tax salary in exchange for a benefit from their employer. Common benefits utilised via a salary sacrifice mechanism include pensions arrangements, childcare provisions and access to a bike via the Cycle to Work Scheme.
Tax brackets	Used to determine how much taxable income an individual has based on their earnings. An individual is usually categorised by the highest bracket which they pay tax in. Tax brackets and rates differ for Scottish taxpayers. When this research was conducted, the non-savings non-dividend tax bands in the rest of the UK (England, Wales and Northern Ireland) in 2023 to 2024 were as follows: basic rate taxpayers pay 20% tax on earnings between £12,571 to £50,270, higher rate taxpayers pay 40% tax on their earnings between £50,271 to £125,140, and additional rate taxpayers pay 45% tax on their earnings over £125,140.

1. Executive summary

1.1 Introduction

In March 2023, HM Revenue and Customs 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 NI relief) on pension salary sacrifice arrangements may impact employers’ motivations and attitudes towards these arrangements.  

To undertake this research, a qualitative approach was designed to ensure the data that was collected was sufficiently rich to understand the motivations behind using salary sacrifice for pension contributions, as well as not using it. Due to the qualitative method, findings are only reflective of the employers that took part in the research and provide an indication of a range of views and experiences. They do not intend to be statistically representative of the wider population.

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.

Throughout this report, interview participants are referred to as ‘employers’. Where the term ‘salary sacrifice’ is used, this refers to a salary sacrifice pension arrangement unless explicitly stated otherwise.

1.2 Motivations for offering or not offering salary sacrifice for pensions

When asked about the motivations for their business or organisation to offer salary sacrifice for pensions, employers noted that it was generally seen as beneficial for both the employer and their employees. The most common reason reported for offering employee pensions through a salary sacrifice arrangement were the NI savings for both the employer and their employees.

Employers offering salary sacrifice for pensions included in this research said that all employees who qualified for a pension were offered the salary sacrifice arrangement, and employers reported that most of their employees took up the offer.

Employers said they offered their employees the flexibility to vary the level of salary sacrificed, essentially changing their level of pension contributions. Employers said that employees could vary the amount of salary sacrificed, so long as their take-home pay still met the National Minimum Wage.

Generally, employers reported that they found salary sacrifice easy to explain to their employees. However, it is worth noting that some of the findings suggested that there was limited understanding among some employers about how it works. This is explored in more detail in the main body of the report.

Most of the employers not offering salary sacrifice for pensions had a basic understanding of how pension salary sacrifice works. They understood it involved an employee giving up part of their salary in return for a benefit. However, awareness of the financial benefits was mixed. While those that offered salary sacrifice for other benefits knew that it involves an employee giving up part of their salary in return for something else, in the case of pension contributions, awareness of the NI savings were mixed.

Employers not offering salary sacrifice for pensions were asked why they did not offer it. Some said it was because of the additional administration required, some felt that the size of the business meant it was not worth it, and some did not know enough about it to offer it.

1.3 Impact of offering or not offering salary sacrifice for pensions

Most employers offering salary sacrifice for pensions in this research said they found it easy to administer, with many describing it as very easy to manage with almost no administrative burden once set up.

Most employers said there was no real difference in the administrative burden of salary sacrifice for pensions compared to other pension mechanisms, such as net pay arrangements or relief at source.

Most employers said they did not use the NI savings from the salary sacrifice arrangement to directly fund their workplace pension, including to improve the generosity of the employer pension contributions. Some employers explicitly said the NI savings did not go towards anything in particular, although others were unsure. Some employers said they passed on the employer NI savings from salary sacrifice to their employees by increasing their employer pension contributions.

Among employers not offering salary sacrifice for pensions in this research, most explained that they had not had requests for it from employees and generally thought they would not offer it in the future. However, some noted that they would consider it next time they reviewed their pensions, especially if there was employee pressure.

Many employers offering salary sacrifice in this research said they felt their current pension offering had a positive impact on employee retention – they considered that the salary sacrifice arrangement added to the overall package they could provide to their employees. Employers said this was due to the NI savings the employee could make from the salary sacrifice pension arrangement, and, in some cases, where employees could also receive higher employer pension contributions as a result of employers also contributing their NI savings. Some employers felt that their pension offering had a positive impact on recruitment, although to a lesser extent than retention.

1.4 Exploring existing salary sacrifice arrangements for pensions with hypothetical scenarios

To explore the benefits of existing salary sacrifice arrangements for pensions, employers offering salary sacrifice for pensions were presented with 3 hypothetical scenarios that they were asked to compare to a baseline arrangement. These scenarios were presented to employers in real time, to understand their initial reflections or responses. In practice, the interviews revealed the challenge of asking questions about hypothetical scenarios as employers were hesitant to report exactly how their business or organisation would respond.

All hypothetical scenarios used an example baseline arrangement of an employee on a yearly salary of £35,000, where the employee sacrifices 5% (£1,750) of their £35,000 salary and in return the employer contributes the same amount (£1,750) into the employee’s pension scheme. The employer also contributes a further 3% (£1,050) outside of the salary sacrifice arrangement. The employee is subject to the tax rates of the rest of the UK (excluding Scotland) and their earnings are consistent throughout the year. The tax charges referenced in these scenarios were relevant at the time of interviewing.

Hypothetical scenario 1

The first scenario removed the NI exemption for employers and employees, resulting in employer and employee NI charges on the salary that the employee sacrificed. Consequently, compared to the baseline arrangement, the employer would pay an additional £242 in NI and an employee would pay an additional £210 in NI per year when using salary sacrifice for pensions.

Reactions to scenario 1 were broadly negative, although no employer included in this research definitively said they would stop offering salary sacrifice for pensions. Employers generally suggested that, if salary sacrifice for pensions worked in this way, they would need to investigate how the additional costs would affect their budget before either continuing with salary sacrifice for pensions or looking to change to a different pension arrangement.

Hypothetical scenario 2

The second scenario removed the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed. Consequently, compared to the baseline arrangement, the employer would pay an additional £242 in NI and the employee would pay an additional £560 in combined NI and income tax per year when using salary sacrifice for pensions.

Scenario 2 had the most negative response from employers included in this research. Some employers said that they would stop offering salary sacrifice for pensions, while others said they would look into other options to see how they compared. Most employers considered it such a limitation on salary sacrifice for pensions that it rendered the salary sacrifice arrangement redundant.

Hypothetical scenario 3

The third scenario removed the NI exemption but only on salary sacrificed above a £2,000 per year threshold. For an employee earning £35,000 who has sacrificed 5% of their salary, the annual amount of salary sacrificed falls below the threshold so no additional NI would need to be paid. However, if the employee earned a higher wage, meaning their 5% contribution was over £2,000, or the employee opted to sacrifice an amount greater than £2,000, this would result in an employer and employee NI charge on the salary beyond that threshold. For example, an employee earning £45,000 who reduces their salary by 5%, would pay an additional £30 in NI annually and the employer would pay an additional £34 in NI.

Scenario 3 was viewed most favourably by employers included in this research. Some noted that, due to the level of their staff wages, it would have a minimal impact if salary sacrifice for pensions worked in this way. However, many were still concerned that it was a reduction of benefits as some employees would be subject to increased tax charges and that, regardless of earnings, this could disincentivise saving into a pension due to the additional complexity. Employers noted that it was the most complicated of the 3 scenarios and showed some frustration at the added burden of calculating these differences, stating that they did not want to manage 2 systems.

Employers flagged that all 3 scenarios would likely affect employee morale as they would have to face additional charges of NI that they had previously not incurred. Compared to the scenarios 1 and 2, many felt they could talk with their employees more reasonably about scenario 3 and that there would be a greater understanding on their part of why it may be introduced.

2. Introduction

2.1 Background

In March 2023, 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 NI relief) on pension salary sacrifice arrangements may impact employers’ motivations and attitudes towards these arrangements.

Workplace pension schemes are generally funded via a combination of employer and employee contributions. Employer pension contributions are exempt from income tax and NI and employee contributions are exempt from income tax but chargeable to employer and employee NI. Relief at source and net pay mechanisms are the formal channels for administering income tax relief on employee pension contributions.

Salary sacrifice for pensions refers to an alternative arrangement in which, in return for an employee giving up a portion of their salary, the employer pays an equivalent amount into their pension as an employee pension contribution. This arrangement results in employer and employee NI savings relative to using relief at source or net pay mechanisms, as the amount of salary sacrificed and corresponding employer pension contributions are exempt from both income tax and NI. In 2019, 30% of private sector and 9% of public sector employees used a salary sacrifice arrangement for their pension contributions.

Around the beginning of the 21st century, salary sacrifice for pensions and other benefits began to be offered on a formal basis to employees and became very popular over the subsequent decade. In 2016, HMRC conducted a review of salary sacrifice arrangements, due to the following concerns:

The effect of these arrangements is often to reduce the amount of tax, employee, and employer National Insurance contributions (NI) due on the employee’s remuneration. The growth has resulted in an increasing cost to the Exchequer and creates an uneven playing field between employees and employers who use such arrangements and benefit from the tax and NI advantages, and those who don’t. Only a minority of employers offer salary sacrifice schemes to their employees

The result of this review, including a public consultation, was the removal from April 2017 of the tax and NI advantages of salary sacrifice for the majority of benefits-in-kind except in relation to employer pension contributions, pensions advice, certain childcare benefits, Cycle to Work schemes, and ultra-low emission cars.

2.2 Objectives

The core objectives of this research were to:

• understand the experiences, motivations, and attitudes of employers towards using pension salary sacrifice arrangements, including employers who do and do not offer the arrangement

• explore whether hypothetical changes to tax reliefs (such as reform of NI relief) on pension salary sacrifice arrangements may impact employers’ motivations and attitudes towards these arrangements

2.3 Methodology

To undertake this research, a qualitative approach was used to ensure the data that was collected was sufficiently rich enough to understand the motivations behind using salary sacrifice for pensions, as well as not using it, and therefore to explore whether these would change if salary sacrifice for pensions worked differently.

A random sample of UK businesses with at least one employee was sourced from the commercial database provider, Market Location. The sample contained businesses of varying size, industry sector and location of their head office in the UK. This was to ensure that interviews collected a range of views from employers who may face different barriers, costs, and challenges regarding but not limited to their workplace pension arrangements.

Between 30 May to 3 August 2023, IFF conducted 50 qualitative in-depth interviews via telephone or Microsoft Teams.

• 41 interviews were conducted with businesses that offered a salary sacrifice arrangement for pensions

• 10 interviews were conducted with businesses that did not offer a salary sacrifice arrangement for pensions

Businesses identified the person most suitable to participate in the interview on their pensions and salary sacrifice arrangements. Interviewees were predominantly in HR or finance roles. Table 3.1 shows a breakdown of the characteristics of the businesses included in the sample. Businesses recruited for this research reflected a range of industry sectors and locations.

Among those who offered salary sacrifice for pensions, 20 of the 41 employers said they had employees that earned more than £100,000. Among those not offering salary sacrifice, 4 of the 10 said they had employees that earn more than £100,000, so around 50% of employers in both groups. Medium and large employers were more likely to have employees earning over £100,000. This was monitored during recruitment in order to ensure diversity in employee salaries to ensure any potential differences on this variable could be drawn out of the findings.

Table 3.1 Breakdown of total sample

Employer size	Total number of interviews	Offered salary sacrifice for pensions	Did not offer salary sacrifice for pensions
Large (250+ employees)	16	14	2
Medium (50-249 employees)	15	14	1
Micro/small (1-49 employees)	20	13	7
Total	51	41	10

2.4 Analysis and reporting

Approach to analysis

Individual analysis of each interview was entered into an analysis framework, allowing interview discussions to be compared and judgements to be made about the commonality of experiences. The framework contained variables relating to business characteristics, such as size, to identify whether there were any subgroup differences. IFF then conducted an analysis session, in which researchers developed their thinking regarding the findings. This included individual researchers bringing their tentative interpretation of the findings to the session. This was discussed, with reference to the evidence, to verify our interpretation of the findings through applying a degree of scrutiny and challenge to each other’s perspectives.

How to read this report

Throughout this report, interview participants are referred to as ‘employers’. Where the term ‘salary sacrifice’ is used, this refers to a salary sacrifice pension arrangement unless explicitly stated otherwise.

The purpose of qualitative research is to explore a diverse range of views on a topic or issue, looking to understand how and why these views are expressed by respondents. Due to the qualitative method, findings are reflective of the employers that took part in the research and provide an indication of a range of views and experiences. They do not intend to be statistically representative of the wider population.

This report includes the findings from the subgroup analysis that was carried out as part of this research. Where differences between subgroups were identified during the analysis, such as by employer size, these have been included in the report. In practice, the analysis found that the responses of employers were consistent across subgroups.

This report presents findings from employers interviewed in real time. Previous research on pensions commissioned by the Financial Conduct Authority and commissioned by the Department for Work and Pensions has consistently shown a substantial level of misunderstanding. Where there has been a clear misunderstanding on behalf of a participant in this research, such as describing Automatic Enrolment as an ‘alternative scheme’ to salary sacrifice, we have flagged this misunderstanding. However, it is important to note that there may be other perceptions that have been reported, caused by a misunderstanding the participant had regarding salary sacrifice for pensions, which haven’t been identified in this report.

3. Motivations for offering or not offering salary sacrifice for pensions

This chapter explores the reasons for choosing to offer salary sacrifice for pensions, the extent to which all employees were eligible for pensions salary sacrifice, and the impact of Automatic Enrolment. The chapter concludes by exploring employers’ views on explaining salary sacrifice for pensions to their employees, understanding of salary sacrifice among employers not offering it for pension contributions, and the reasons for not doing so.

3.1 Awareness of and length of time offering salary sacrifice for pensions

Employers included in this research who offered salary sacrifice for pensions said they personally became aware of it through a variety of sources. These included via their current business or organisation offering the salary sacrifice arrangement when they joined, from a previous job where the arrangement was offered, or through working in a financial role more generally. Some employers, largely micro and small employers, said they became aware of salary sacrifice for pensions through their pension provider or financial advisor for the business or organisation, as highlighted in the following quotes.

“That’s why we brought in consultants, because we didn’t feel we were suitably qualified to choose a pension scheme for our employees.” (Administration Director, Micro or small employer, Services sector, Offered salary sacrifice)

“Our pension administrator looks at our pension on a regular basis and advises us accordingly whether the pension scheme that we’ve got is fit for purpose and how it’s performing and stuff like that. So they would have given us advice on that.” (HR Manager, Micro or small employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

Other employers became aware of salary sacrifice for pensions via information on Gov.uk. Although not a common finding, some employers explained that they actively looked for information after employees had asked them about making their pension contributions via salary sacrifice.

“We had some of the employees asking if we would set up salary sacrifice, so we looked into it and the benefits were fixed on both sides.” (Payroll Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Most employers in this research said they had offered salary sacrifice for pensions for several years, with some stating it pre-dated the introduction of Automatic Enrolment (introduced from October 2012). Employers generally said they planned to offer salary sacrifice indefinitely. 

Most employers offered their salary sacrifice pension arrangement through an external pension provider, whilst some reported using Nest, a workplace pension scheme set up by the government, and one employer had set up their own group personal pension scheme.

3.2 Reasons for offering salary sacrifice for pensions

Salary sacrifice for pensions was generally seen as beneficial for both the employer and their employees. The most common reason reported for offering the salary sacrifice arrangement for pensions were the National Insurance contributions (NI) savings for both the employer and their employees. Employers provided a range of views on the impact of these savings which are explored in the next chapter.

“It’s tax efficient both for the company and the employee… If it [salary sacrifice] were to go away, it would be an additional cost of £600 to 700k per annum to the company in National Insurance.” (Finance Director, Large employer, Construction sector, Offered salary sacrifice)

“It has been set up to reduce the tax burden on the employer and employees…and on the advice of the accountants as they advise a salary sacrifice arrangement for the same reasons.” (Financial Controller, Micro or small employer, Real Estate Activities, Offered salary sacrifice)

Some employers explicitly stated that salary sacrifice was the most tax efficient option and helped to make contributing to a pension scheme as attractive as possible to their employees, although this was not reported by all employers. For example, one employer said they were unsure if employees would notice the income tax or NI savings associated with the salary sacrifice arrangement, reflecting that employees would be more likely to appreciate the benefit of being in a pension scheme at all. This employer recognised that employees who choose to sacrifice an amount of their salary above the Automatic Enrolment (AE) minimum might be more inclined to notice the income tax and NI savings from the salary sacrifice arrangement.

Another reason provided by some employers for offering salary sacrifice for pensions was that it was advantageous to recruitment and retention. For example, some employers explained that they promoted the salary sacrifice pension arrangement as an employee benefit due to the tax advantages and, where relevant, that the employer would contribute above the minimum requirement, using their NI savings from the salary sacrifice arrangement to top-up their contribution. This top-up was seen by some employers in this research as an additional employee benefit, beyond their salary, to attract and keep staff.

“It increases the likelihood of them staying…staff retention is the most important benefit for us…we have a low staff turnover and it’s very helpful in the relationship with employees.” (Managing Director, Micro or small employer, Finance sector, Offered salary sacrifice)

“Our employees are very behind our pension scheme; it would probably be [regarded as] one of the best benefits they see that we offer.” (Assistant HR Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Some employers said that they offered salary sacrifice for pensions because it was easy to administer, with one employer also highlighting that it was easy for their employees to understand, although these employers did not provide a comparison to administering or explaining other pension arrangements.

“It’s fairly self-explanatory, there’s also a pack you can download from [the pension provider].” (Finance and Operations Manager, Micro/small employer, Wholesale and Retail sector, Offered salary sacrifice)

3.3 Eligibility for salary sacrifice for pensions

All employers offering salary sacrifice for pensions in this research said that all employees were eligible for salary sacrifice, as long as the reduction in their salary would not result in their earnings falling below the National Minimum Wage. In addition, all employees who qualified for a pension under Automatic Enrolment and qualified for salary sacrifice were offered the arrangement. For some employers in this research, the salary sacrifice arrangement was the default way of offering a pension.

Employers reported that most of their employees took up the offer of salary sacrifice for their pension contributions, regardless of whether it was the default pension arrangement or not.

“If you can save tax, why wouldn’t you go into it?” (Compensations and Benefits Global Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

“They can see the benefit because I give them an example of with net pay and salary sacrifice and they all save a bit of money in their pay packet each month.” (Payroll Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Reasons provided by employers for employees choosing not to opt in to the salary sacrifice pension arrangement included the restrictions around Additional Voluntary Contributions (AVCs), since the non-salary sacrifice arrangement was considered to offer more flexibility to employees for these. AVCs are contributions that can be made in addition to the normal contributions to an occupational pension scheme in order to increase retirement benefits. Additionally, employers said that some employees opted out of paying into a pension altogether, and that these tended to be younger people in lower-level roles.

Most employers included in this research said the proportion of employees opting for salary sacrifice for their pension contributions had remained stable over recent years.

“It could be because it’s a default and they are made aware of that is how this pension works…or maybe it’s because of the benefit.” (Payroll Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

However, some did report changes in the number of employees choosing the salary sacrifice arrangement for their pension. For example, some employers said they had seen an increase following the government announcement of a planned increase in National Insurance from April 2022^{[footnote 1]}, and therefore considered that employees wanted to take advantage of the NI savings from a salary sacrifice pension arrangement. Some employers said they had seen an increase in the proportion of older employees taking up the offer of a pension salary sacrifice arrangement as they approached retirement. Meanwhile, some employers said they had seen a decrease in the proportion of employees using salary sacrifice for their pension contributions. This was considered to be a result of changes to wage legislation, such as increases to the National Minimum Wage, which would mean that the salary sacrifice contributions would take an employee’s salary below the required threshold, or simply a result of fewer employees understanding and opting to use the salary sacrifice arrangement.

“[The proportion of employees using salary sacrifice for their pension contributions has slightly decreased in recent years] not because they don’t want to participate in salary sacrifice, it’s because national minimum wage legislation doesn’t always seem compatible with salary sacrifice legislation.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

3.4 Varying the amount of salary sacrificed

Employers included in this research said they offered their employees the flexibility to vary the amount of salary they sacrificed. Employees could vary the amount sacrificed, so long as they met the Automatic Enrolment minimum and their take-home pay did not fall below the National Minimum Wage. Some employers allowed employees to vary the amount sacrificed on an annual basis at a specific point in the year, while others allowed employees to make a change to the amount of salary they sacrificed throughout the year.

The methods of administering changes to the amount of salary sacrificed differed amongst employers. Some employers said that the employee would need to complete a form and the employer would then alter the amount through the payroll software. Other employers said that employees would need to get in touch directly with the pension provider to change the amount of salary to be sacrificed.

Some employers acknowledged that it tended to be employees of at least middle age who would want to increase the amount of salary sacrificed, the nearer they got to retirement age, since they considered that younger employees were less likely to think about their pension. Some employers explained that getting a pay rise would sometimes prompt employees to contribute more to their pension and therefore increase the amount of salary sacrificed.

“We tend to find its employees that are approaching retirement and looking to increase their savings [that vary the level of salary sacrificed].” (HR Manager, Large employer, Construction sector, Offered salary sacrifice)

3.5 Impact of Automatic Enrolment  

Introduced from October 2012, Automatic Enrolment occurs when an employee who meets the qualifying criteria is made a member of a workplace pension scheme without needing to ask to be part of it (see Glossary). Most employers included in this research said that the Automatic Enrolment requirement had not impacted how their business offered salary sacrifice for pensions.

“Auto Enrolment didn’t come into salary sacrifice.” (Payroll Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Some employers explained that the introduction of salary sacrifice coincided with Automatic Enrolment as they did not offer a workplace pension scheme previously. Others said they did not introduce salary sacrifice for pension contributions until a later stage, sometime after Automatic Enrolment had been introduced.

“As far as I am aware there wasn’t a pension scheme prior to Automatic Enrolment.” (Finance Manager, Micro or small employer, Services sector, Offered salary sacrifice)

For some employers, the introduction of Automatic Enrolment changed how they administered the salary sacrifice arrangement for pensions. For example, some larger employers said that, prior to Automatic Enrolment, not everyone was offered a pension, so the introduction of Automatic Enrolment meant that they extended salary sacrifice for pensions to all employees rather than those on particular contracts. In another example, an employer explained that, before Automatic Enrolment, the business used to pass on the employer NI savings from the salary sacrifice arrangement to their employees in the form of higher contributions, but since the introduction of Automatic Enrolment and the extension of the salary sacrifice arrangement to all eligible employees, they had chosen to retain the employer NI savings instead.

As covered in the next chapter, employers were asked how they used the NI savings from the salary sacrifice arrangement. Most employers said they did not use the NI savings to directly fund their pension, acknowledging instead that the savings would be absorbed into general business running costs (including pensions). When explicitly prompted on whether they used the NI savings to cover the costs of Automatic Enrolment, some employers recognised that they did use the NI savings from the salary sacrifice arrangements for this purpose. This was reported by employers of a range of sizes.

“It’s not something we have sat down and worked out, but I would say yes, we use the tax savings from salary sacrifice to cover the minimum contributions for Automatic Enrolment.” (Head of Personnel and Finance, Micro/small employer, Construction sector, Offered salary sacrifice)

3.6 Ease of explaining salary sacrifice for pensions to employees

In general, employers in this research said that they found salary sacrifice easy to explain to their employees.

“Yes, it’s easy [to explain]. We’re saying, you’re giving up part of your salary in order for the company to put the same amount into your pension…and to ease National Insurance [Contributions].” (Finance Director, Large employer, Construction sector, Offered salary sacrifice)

Employers also said that explaining salary sacrifice to their employees was part of a broader activity of explaining the purpose of paying into a pension altogether, although some employers recognised the challenges of doing this at all with some employees, including younger employees who had less experience with pensions, or with employees who did not have English as their first language.

“It’s become quite a hard sell because young people just don’t think pensions are a great investment.” (Finance Director, Medium employer, Real Estate Activities, Offered salary sacrifice)

Although not a common finding, one employer acknowledged that explaining salary sacrifice could be challenging because they personally lacked knowledge on the topic.

“It’s our knowledge as employers. We’re not as knowledgeable as we should be.” (Managing Director, Medium employer, Services sector, Offered salary sacrifice)

Methods of explaining salary sacrifice included putting worked examples of the salary sacrifice arrangement on the workplace intranet, giving an information pack on pensions to new employees, and using payslips to highlight the differences and benefits compared to a non-salary sacrifice arrangement.

“It’s a box I have to sign on their induction form that says I’ve explained it to them.” (Head of Personnel and Finance, Micro or small employer, Construction sector, Offered salary sacrifice)

3.7 Understanding of salary sacrifice for pensions among employers not offering it

Interviews with employers not offering salary sacrifice for pensions explored their understanding of a salary sacrifice arrangement in general, before exploring their understanding of how salary sacrifice works in relation to pensions.

Employers not offering salary sacrifice for pensions had a general understanding of how salary sacrifice works for all applicable benefits. They understood it involved an employee giving up part of their salary in return for a benefit. Some of these employers did already use salary sacrifice for other benefits such as company cars^{[footnote 2]} , childcare vouchers and Cycle to Work schemes.

“Giving up part of your wages for a non-cash benefit.” (Accounts Manager, Micro or small employer, Real Estate Activities, Did not offer salary sacrifice)

“Generally you offer a service then get a tax-free allowance towards this…” (Pensions Manager, Large employer, Services sector, Did not offer salary sacrifice)

Most employers not offering salary sacrifice for pensions had some understanding of how salary sacrifice for pensions works. They said they had become aware of salary sacrifice for pensions through the HMRC website, a cost-of-living webinar put on by Nest, word of mouth, or via a newspaper.

However, awareness of the financial benefits was mixed. While those that offered salary sacrifice for other benefits knew that it involves an employee giving up part of their salary in return for a benefit, in this case pension contributions, awareness of the NI savings were mixed when directly asked about them in the interviews.

“An employee would give up part of their salary and in return the employer would make a direct contribution to a pension scheme on behalf of that employee.” (Administrator, Micro or small employer, Services sector, Did not offer salary sacrifice)

Amongst employers not offering salary sacrifice for pensions included in this research, none had offered salary sacrifice for pensions in the past.

3.8 Reasons for employers not offering salary sacrifice for pensions

Employers not offering salary sacrifice for pensions provided a range of reasons why this was the case in the interviews.

Some employers said they did not offer the salary sacrifice arrangement because of the administration required. For example, one employer explained that some of their employees were on lower wages so would not be eligible for salary sacrifice as their salary would drop below National Minimum Wage. This would therefore require them administering 2 pension arrangements, which they saw as an administrative burden. Some employers did not feel that setting up the salary sacrifice arrangement for pensions was worth the additional administration due to the size of their business and the number of employees in the pension scheme.

“If we were a bigger organisation it would be worth it, but not for a small family company like us.” (Accounts Manager, Micro or small employer, Real Estate Activities, Did not offer salary sacrifice)

Another reason for not offering salary sacrifice for pensions was that employers did not know enough about it. Whilst some employers were aware of the NI savings when offering salary sacrifice pensions, others were not.

“It’s never been explained to us and we haven’t done enough research on it as well.” (Company Secretary, Micro or small employer, Transportation sector, Did not offer salary sacrifice)

In the interviews, employers not offering salary sacrifice for pensions were asked what type of pension scheme they offered. Most employers said they offered a Defined Contribution scheme, for example Nest, and one employer said they offered a Defined Benefit scheme. These employers were also asked the method of tax relief used in their pension scheme. Although employers indicated either a net pay arrangement or relief at source in the interviews, only one employer could confidently confirm which they used demonstrating a limited understanding amongst these employers about how their pension scheme worked.

Some employers not offering salary sacrifice for pensions said they contributed above the Automatic Enrolment minimum, with one of these employers explaining that they had started to do this to help with recruitment since a higher employer contribution was seen as an attractive benefit.

3.9 Chapter summary

The most common reason for offering employee pensions through a salary sacrifice arrangement were the NI savings for both the employer and their employees.

Most employees took up the offer for having their pension administered through salary sacrifice. Employees could vary the level of salary sacrificed, essentially changing their level of pension contributions, so long as their take-home pay still met the National Minimum Wage. Generally, employers reported that they found salary sacrifice easy to explain to their employees.

Most of the employers not offering salary sacrifice for pensions had some understanding of how pension salary sacrifice works, although awareness of the financial benefits was mixed. The main reasons for not offering salary sacrifice for pensions were the administration required, feeling it was not worth it due to the small size of the business, and lack of understanding.

4. Impact of offering or not offering salary sacrifice for pensions

This chapter starts by exploring employers’ views on the ease of administering salary sacrifice for pensions and the impact of salary sacrifice on the generosity of pension contributions. It then covers the demand for salary sacrifice for pensions and the likelihood of offering it in the future among employers not offering it, before exploring awareness of the changes to the Annual Allowance and Lifetime Allowance. The chapter concludes by reporting employers’ views on the impact of salary sacrifice for pensions on recruitment, retention and company culture.

4.1 Ease of administering salary sacrifice for pensions

Generally, the interviews revealed that offering salary sacrifice for pensions was not overly burdensome for most employers. However, as explored in this section, there was diversity of opinion amongst what constitutes an administrative burden.

Most employers offering salary sacrifice for pensions said they found it easy to administer, with many reporting it as very easy to manage with almost no administrative burden once it has been set up. Some employers said they used a third party to handle their pension scheme, such as an accountant or pension administrator. They explained that they just needed to notify them of new starters and whether they wished to contribute to their pension with the salary sacrifice arrangement.

“We just tell them this person wants to pay their pension by salary sacrifice and they run the payroll for us with the pension and they send the pension payments to the pension company.” (HR Manager, Micro or small employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

Some employers in this research reported minor administrative burdens relating to salary sacrifice for pensions, regardless of the size of the business. For example, some employers highlighted the additional administration required when simply extending the arrangement to more employees in the business, or when employees choose to increase or decrease the amount of salary sacrificed towards their pension. One employer specifically highlighted needing to conduct checks to ensure each employee is eligible for salary sacrifice since the rules relating to the NMW meant that salary sacrifice could not be offered to their workforce universally. Although not a common finding, technical issues were mentioned by some employers in this research, specifically where salary sacrifice created issues with payroll software not interacting with pension platforms, such as Nest, which then took time to resolve.

“The only admin burden is that the national minimum wage stands in the way of it being a universal offering.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

Most employers included in this research said there was no real difference in the administrative burden of using salary sacrifice for their pension compared to not using it, though some did report differences. For example, some employers felt that using the salary sacrifice arrangement was less burdensome than not using it, pointing to technological developments of payroll software to now include a ‘built-in’ feature to calculate salary sacrifice. Although not a common finding, some employers reported that they had chosen a salary sacrifice arrangement for their pensions specifically for the ease of administering it.

“They’ve updated their package a lot more for salary sacrifice, you just plug in your figures and apart from matching up with the sheet to make sure you just put in the information.” (Financial Controller, Medium employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

Meanwhile, other employers felt that using the salary sacrifice arrangement was more burdensome than not using it. They highlighted that they must organise an annual salary sacrifice agreement with employees (such as via DocuSign), and make efforts to remind employees of their options and how these might affect them. One employer said the only difference is explaining how salary sacrifice works to people when they are first considering it.

In general, employers included in this research suggested that the level of administrative burden had not changed in the last few years. The exception to this was the additional administration required by employers at the time of the Coronavirus Job Retention Scheme – since the scheme affected employees’ income levels, some additional administration was required by employers to adjust the their salary sacrifice arrangements.

Most employers included in this research did not report any costs associated with offering salary sacrifice for pensions, outside of costs to the payroll provider, third-party administrators, or small consultancy fees to advise on benefits and legal requirements. Most employers incurring these costs stated that these were no different from the costs associated with any other type of pension.

“We have communications that we need to check to make sure they’re compliant, but we would do that even if it wasn’t salary sacrifice.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

4.2 Impact of salary sacrifice on the generosity of pension contributions

This section firstly covers pension contributions from the employer before exploring the amount of salary sacrificed by the employee. There was a mixed response regarding whether the use of salary sacrifice did lead to more generous pension 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, including to improve the generosity of their employer pension contributions.

“I don’t think the NI saving was a big factor in the decision for us to contribute more. We wanted to give a good pension scheme to our employees. For retention and recruitment there needed to be a decent pension scheme, so that’s why we agreed to pay more.” (Pensions Administration Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

In general, employers said that their NI savings were absorbed into general business running costs. As part of this, some employers recognised that these savings would be used to fund important operations or activities, like wages and pensions, in an indirect way. Other employers either specifically said that the savings did not go towards anything in particular, or that they were unsure whether they were used to fund anything specific.

Some employers included in this research said they passed on the NI savings from the salary sacrifice arrangement to their employees in the form of larger employer pension contributions, above the minimum Automatic Enrolment requirement for employers. For example, one employer reported that they added an extra half a percent onto their employer pension contributions because of the NI savings from salary sacrifice.

While most employers said they did not use the NI savings from the salary sacrifice arrangement to contribute above the Automatic Enrolment minimum, of those who did, most said that without the employer NI savings they would likely reduce their contributions, since there would be no NI savings to pass on to employees. More generally, some employers acknowledged that the removal of any savings for businesses would result in less money for other operations.

Although some employers included in this research noted that the level of employee contributions had gone up since they started using salary sacrifice, represented by a higher level of salary sacrificed under this arrangement, most said they had not seen a change. Employers that had noticed an increase acknowledged that it was unclear as to what had driven this – whether it was related to the salary sacrifice arrangement, salary increases, or a change in an employee’s personal circumstances.

“I think more people have chosen to put more into their pension but whether that’s to do with salary sacrifice or not I couldn’t say. It could be that their kids have left home now and they have a little bit more in their pot…and they’re thinking of the future…but I’ve not asked them.” (Finance Manager, Medium employer, Services sector, Offered salary sacrifice)

In general, employers not offering salary sacrifice for pensions included in this research said they had not experienced any disadvantages by not offering it, nor felt as though not offering salary sacrifice affected employee pension contributions. It is important to note that none of these employers had offered salary sacrifice for pensions in the past so could not make a direct comparison. Most employers not offering salary sacrifice did not feel that their pension offering had a significant impact on recruitment and retention.

“As far as I’m aware no one has ever turned down a job on the basis of the pension scheme being offered.” (Accountant, Micro or small employer, Wholesale and Retail sector, Did not offer salary sacrifice)

4.3 Demand for salary sacrifice for pensions and the likelihood of offering it in the future

Among employers not offering salary sacrifice for pensions, there was a mixed response regarding demand for it and whether they might offer it in the future.

Most employers not offering salary sacrifice for pensions in this research said they had not had requests for it from employees. Whilst some had noted ‘rumblings’ regarding pension salary sacrifice amongst employees, these had rarely, if ever, turned into substantial requests.

“The issue we have to address is the level of contribution, not the method that we achieve that with.” (Administrator, Micro/small employer, Services sector, Did not offer salary sacrifice)

Employers not offering salary sacrifice for pensions generally thought they would not offer it in the future. However, some noted that they may consider it next time they reviewed pensions, especially if there was employee pressure, although they did not specify how often they reviewed their pension.

“We probably just need to know a little bit more about it and potentially do a bit more reading up on it. I don’t see why it’s something we couldn’t offer.” (Company Secretary, Micro or small employer, Transportation sector, Did not offer salary sacrifice)

4.4 Awareness of changes to the Annual Allowance and Lifetime Allowance

Awareness of changes to pensions announced in the Spring Budget 2023 to the Annual Allowance and Lifetime Allowance were mixed among both employers offering and not offering salary sacrifice for pensions included in this research.

Both groups of employers felt these changes would have minimal impact on their pension arrangements, with most of their employees being unaffected by the changes.

“We have no one who contributes to that level so it wouldn’t make a difference to it.” (CFO, Medium employer, Wholesale and Retail sector, Offered salary sacrifice)

Although not a common finding, some employers included in this research reported some changes since the announcement, including employees opting back into the pension scheme who previously would have been in excess of their allowance, and one employer not offering salary sacrifice reporting an increase in employee contributions among directors at the business.

4.5 Impact of salary sacrifice for pensions on recruitment, retention and company culture

Employers offering salary sacrifice were asked how important they thought their current pension offering was in terms of recruitment and retention of staff, and then subsequently how important it was in terms of company culture.

In general, employers included in this research did not necessarily consider the salary sacrifice arrangement on its own, considering it instead as part of their overall pension offering. This meant they could not always confidently report the degree to which salary sacrifice on its own influenced recruitment, retention or company culture.

Many employers offering salary sacrifice in this research said they felt their current pension offering had a positive impact on employee retention – they considered that the salary sacrifice arrangement added to the overall package they could provide to their employees to encourage them to stay.

“I think if they were looking at another employer that didn’t offer that [salary sacrifice] it would be a good reason for them to stay with the business.” (HR Manager, Large employer, Construction sector, Offered salary sacrifice)

Employers said this was due to the NI savings the employee could make from the salary sacrifice pension arrangement, and, in some cases, where employees could also receive higher employer pension contributions as a result of employers also contributing their NI savings.

For the same reasons, some employers also noted that their pension offering – including the salary sacrifice arrangement – had a positive impact on recruitment, although to a lesser extent than retention. For example, one employer described pensions as a ‘hot topic’ and considered it vital that they could offer a good pension package, including salary sacrifice, to attract employees.

“Pensions is quite a hot topic, [candidates] do talk about it, ‘what’s your pension scheme? How much do you offer?’ Whereas before, I don’t think people really spoke about it…It’s in the contract as well, so there is a lot more written information.” (Financial Controller, Medium employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

Some employers reported that they thought their current pension offering – including salary sacrifice – helped attract candidates for senior positions, especially for director positions, although many did not see their pension offering necessarily as a ‘differentiator’ between them and other businesses.

“We’re having to compete with other businesses. We find that having a good pension scheme is a good thing and is something that attracts people.” (Remuneration and benefits advisor, Large employer, Manufacturing sector, Offered salary sacrifice)

Many employers explained that offering a workplace pension is now standard and expected, and the salary sacrifice arrangement is not unique enough to stand out to attract new recruits.

“[Our pension offering is] On par with other employee benefits that we offer. If it was just listed on its own, I’m not sure it would be enough to increase people applying for jobs, but it’s nice to have it on the list along with other benefits.” (Head of Personnel and Finance, Micro small employer, Construction sector, Offered salary sacrifice)

In terms of impact on company culture, some employers – including those that provided employer contributions above the Automatic Enrolment requirement – said their overall pension offering had a positive impact as it was a way to demonstrate that, as a business or organisation, they looked after their employees. Following the findings on retention and recruitment, employers considered the impact on company culture in relation to offering a workplace pension generally as opposed to being specifically related to the salary sacrifice arrangement.

4.6 Chapter summary

Most employers found salary sacrifice easy to administer, with almost no administrative burden once it had been set up. Where administrative burden was reported, it was described as minimal.

Some employers included in this research said they passed on the employer NI savings from salary sacrifice to their employees by increasing their employer pension contribution, however, others said the use of salary sacrifice for pensions did not affect the generosity of their pension contributions. For most employers, the NI savings were absorbed into general running costs to help the business operate – funding the workplace pension was one such cost.

Many employers offering salary sacrifice reported that they felt their overall pension offering had a positive impact on employee retention, noting that salary sacrifice added to the overall package they could provide employees. This was due to the NI savings the employee benefits from through a salary sacrifice pension arrangement, and, in some cases, where employees could also receive higher employer pension contributions as a result of employers also contributing their NI savings.

5. Exploring existing salary sacrifice arrangements for pensions with hypothetical scenarios

This chapter covers the 3 hypothetical scenarios that businesses were presented with during the interview as part of the research. It presents each of the scenarios individually, first explaining the hypothetical change to salary sacrifice for pensions, and then exploring employers’ initial response to them. Employers were asked to consider whether these hypothetical changes may impact their current pension offer, result in any other impacts such as additional costs or administrative burden, and finally how their employees may respond.

The hypothetical scenario questions were only asked to employers offering salary sacrifice for pensions.

It is important to note that these scenarios were presented to employers in real time, to understand their initial reflections or responses. In practice, the interviews revealed the challenge of asking questions about hypothetical scenarios as employers were hesitant to report exactly how their business or organisation would respond. For example, employers consistently reflected that they would need time to fully consider the implications of any changes to salary sacrifice for pensions on their pension offering and more general operations. Further, the interviews revealed some low awareness and misunderstandings amongst employers about pensions.

All hypothetical scenarios used a baseline example of an employee on a yearly salary of £35,000, where the employee sacrifices 5% (£1,750) of their £35,000 salary and the employer contributes 3% (£1,050). In this baselines example, the employee is subject to the tax rates of the rest of the UK (excluding Scotland) and their earnings are consistent throughout the year. Interviews took place between 30 May – 3 August 2023 and any tax charges referenced in these scenarios were accurate at the time of interviewing.

5.1 Hypothetical scenario 1

The first scenario removed the NI exemption for salary sacrifice pensions, which would result in employer and employee NI charges on the salary the employee sacrificed. Consequently, compared to the current salary sacrifice arrangement, the employer would pay an additional £242 in NI and an employee would pay an additional £210 in NI per year when using salary sacrifice for pensions. Table 6.1 presents the difference.

This change to NI would only affect employer contributions provided through salary sacrifice – contributions made through salary sacrifice would continue to be exempt from income tax. Any employer contributions provided outside of salary sacrifice would continue to be exempt from income tax and NI.

Table 6.1 Scenario 1’s impact on employer and employee costs

	Baseline situation with salary sacrifice	Scenario 1: Removal of NI relief with salary sacrifice
Employees gross salary	£33,250 (£1,750 sacrificed)	£33,250 (£1,750 sacrificed)
Employee contribution to pension	£0	£0
Employer contribution to pension	£2,800 (8%)	£2,800 (8%)
Income Tax to be paid	£4,136	£4,136
Employee NI to be paid	£2,482	£2,692
Employer NI to be paid	£3,333	£3,574
Net loss for employee	N/A	-£210
Net loss for employer	N/A	-£241

Initial reaction to the scenario

In general, employers demonstrated a good understanding of this scenario, although there were some employers who misunderstood it. For example, one employer thought that it involved the employee receiving an increased pension contribution, stating that there were positives and negatives to the scenario, whilst others thought that the scenario was introducing a reduced wage, rather than removing the NI exemption.

Where employers understood the scenario correctly, they responded negatively, although no employer definitively said they would stop offering salary sacrifice for pensions. Employers said it removed the purpose of salary sacrifice as they considered the NI savings as the main reason to use salary sacrifice. Many employers also felt that this was a ‘backwards step’ that may cause a decrease in the amount of salary sacrificed from employees, thereby decreasing the total pension contribution, at a time when employers felt their employees should be increasing it. Some employers that made use of their NI savings from the salary sacrifice arrangement to contribute above the Automatic Enrolment minimum were especially opposed to the scenario as they would have to reduce their contribution as a result.

“It would remove a lot of the benefits of salary pension sacrifice.” (Managing Director, Micro or small employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

“That sounds like a backwards step! My employees are going to get less than what they are now as we add the NI saving back into their contribution, and if say we are going to stop that relief then their contribution is going to go down.” (Managing Director, Micro or small employer, Wholesale and Retail sector, Offered salary sacrifice)

Additionally, some employers noted that these changes would be coming during a cost-of-living crisis, and following the damage caused by the Covid-19 pandemic, where they reflected that many employees are feeling as though they are not making enough money to afford necessities. These employers felt that removing the NI exemption at this time would therefore impact employees to a greater extent.

“Any additional cost is obviously a disappointment following the significant hole that Covid and other things have made that do need to be filled.” (Pensions Manager, Large employer, Construction sector, Offered salary sacrifice)

Although they recognised this scenario had a negative outcome, some employers said that it may not have a significant impact. Their reasoning for this in the interviews indicated some misunderstandings about how salary sacrifice for pensions benefits employees compared to other pension arrangements. For example, one of these employers said that income tax relief is the key benefit of salary sacrifice rather than the NI exemption, when in fact other pension arrangements also offer income tax relief.

“When they [employees] look at salary sacrifice…they look at salary sacrifice more for the income tax relief rather than NI. They don’t really look at NI as much, it’s probably because it’s a lower value.” (Financial Controller, Medium employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

Impact on current pension offer

Employers generally suggested that, if salary sacrifice for pensions worked in this way, they would investigate how the additional NI charges would affect their budget before either continuing with salary sacrifice or looking to change to a different pension arrangement. Many employers identified the administrative burden of finding an alternative arrangement as a potential barrier to switching, as well as needing to then explain the new arrangement to employees.

The questions on hypothetical scenarios in the interviews revealed that employers’ understanding and awareness of other pension arrangements were limited. Some stated that they would look to change their pension offer but were unsure of what it would be changed to, noting that they would reach out to external advisors. Others however felt that this additional work would be too much of a burden for the amount of money to be saved in switching.

“I wouldn’t of thought [we would stop offering salary sacrifice] because of the workload involved in changing the scheme – that would be just madness. We’re not qualified pensions operators, that would mean additional costs for us to get somebody in to review and recommend the changes. It’s an unnecessary burden.” (Administration Director, Micro/small employer, Services sector, Offered salary sacrifice)

Responses to this scenario differed between smaller and larger employers. Larger employers tended 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 were prepared to consider the option of absorbing additional NI to avoid any administrative burden.

“The business would stop offering salary sacrifice if there was no financial benefit for doing it for the employer and employee, and go back to net pay, which is just as easy.” (Payroll Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Other impacts

Employers discussed a range of potential impacts of this scenario. Some employers noted that any increased costs may have to be passed onto the customer, leading to an increase in prices, which could result in them being less competitive. Others flagged that the additional costs could have a more significant impact on business viability, especially for those with a larger workforce where the NI charges would add up.

“It could reduce profitability and this raises the question of how viable a business is.” (Payroll Manager, Medium employer, Services sector, Offered salary sacrifice)

However, other employers felt that the change to the NI exemption was small enough that it would not impact their business in a significant way, and that they would either absorb the additional cost or, if they were currently passing the NI savings onto the employee, they would simply reduce their contribution. One employer also considered the change to be so small that they felt employees may not even notice – they considered it a “stealth tax”^{[footnote 3]} that they would only notice if they spoke to the business’s finance department about. Additionally, given that any changes to the NI exemption would affect everyone, there was a recognition amongst these employers that their competitors would also have to adapt their budgets if using salary sacrifice for pensions like them.

“This sort of change being across the employment market, we are not offering stuff that is stratospherically better than other people, we’re just looking to benchmark, so if this change came in universally, I don’t think it would affect the recruitment and retention piece.” (Finance Director, Micro/small employer, Construction sector, Offered salary sacrifice)

Recruitment and retention

Employers’ views ranged on the potential impact on recruitment and retention for this scenario. Some employers reflected that the additional NI charges may impact hiring decisions, such as recruiting fewer staff or moving some employees to part time instead of full time.

As covered in the previous chapter, many employers offering salary sacrifice in this research said they felt their current pension offering had a positive impact on employee retention – they considered that the salary sacrifice arrangement added to the overall package they could provide to their employees to encourage them to stay. When considering this scenario, some employers suggested that, if employees saw that their pension cost them more, they may consider moving to another employer with a more favourable pension arrangement.

“They’re going to see the pension is starting to cost them and it could be things like that that may make them think about moving to another employer.” (HR Manager, Large employer, Construction sector, Offered salary sacrifice)

Employer expectations of employees’ responses

Employers consistently flagged that they thought this hypothetical scenario could affect employee morale as they would have to pay additional NI. Employers flagged that employees sacrificing more salary than the Automatic Enrolment minimum may reduce the amount of salary sacrificed to compensate for paying more NI, and that older employees may be more affected as they would be closer to finalising their retirement plans. Although not a common finding, one employer said if employees were paying additional NI they may expect an increase in salary to compensate.

“If people have plans for their retirement on the basis of a tax contribution and NI saving it completely messes up their retirement provision.” (Finance director, Medium employer, Real Estate Activities, Offered salary sacrifice)

A consistent theme across employers was that this scenario could discourage people from engaging with their pension plans.

“It would make a difference to me, I’d maybe consider whether paying into a pension was the right thing to do.” (Centre Manager, Micro or small employer, Services sector, Offered salary sacrifice)

5.2 Hypothetical scenario 2

The second scenario removed the NI exemption for employers and employees, and the income tax exemption for employees, on the salary sacrificed. Consequently, compared to the current salary sacrifice arrangement, the employer would pay an additional £242 in NI and the employee would pay an additional £560 in combined NI and income tax per year when using salary sacrifice for pensions. Table 6.2 presents the difference.

These NI and income tax charges would only affect contributions provided through salary sacrifice. Any employer contributions provided outside of salary sacrifice would continue to be exempt from income tax and NI. This scenario would not impact overall pension relief provided by the government. Employee contributions would continue to be exempt from income tax using other pension mechanisms.

Table 6.2 Scenario 2’s impact on employer and employee costs

	Baseline situation with salary sacrifice	Scenario 2: Removal of NI relief and Income Tax relief with salary sacrifice
Employees gross salary	£33,250 (£1,750 sacrificed)	£33,250 (£1,750 sacrificed)
Employee contribution to pension	£0	£0
Employer contribution to pension	£2,800 (8%)	2,800 (8%)
Income Tax to be paid	£4,136	£4,486
Employee NI to be paid	£2,482	£2,692
Employer NI to be paid	£3,333	£3,574
Net loss for employee	N/A	-£560
Net loss for employer	N/A	-£241

Initial reaction to the scenario

As with the first scenario, understanding of this second scenario was broadly good, although some employers appeared to underestimate its impact which may indicate a lack of understanding. For example, some employers did not realise that this scenario would make salary sacrifice  more costly than a standard pension scheme. Overall, employers provided a range of views on the perceived impact of this scenario.

In general, of all 3 hypothetical scenarios presented to them, employers responded most negatively to this scenario. Some employers said that they would stop offering salary sacrifice for pensions under this scenario, while others said they would look into other options to see how they compared. Most employers considered it such a limitation on salary sacrifice for pensions that it “renders it redundant”.

“I can just see that in one fell swoop, salary sacrifice will be removed from the landscape because I cannot see any employer continuing with the salary sacrifice scheme, if what is being sacrificed is then being taxed as well as NI levied, whereas paying through a traditional gross salary scheme would receive tax relief.” (Finance Director, Large employer, Construction sector, Offered salary sacrifice)

Compared to the first and third scenarios, micro/small employers often had the strongest reactions to this second scenario, recognising that it would make things more complicated as it may mean administering multiple pension arrangements, as well as the negative financial implication for both employers and employees. However, demonstrating limited understanding of pensions more broadly, no micro/small employers in this research were able to name an alternative scheme outside of ‘standard auto-enrolment’ that they could use instead of the salary sacrifice arrangement, with most saying they were unaware of any alternatives. Whilst not a common finding, one employer stated that they would still offer salary sacrifice if it worked in this way due to lack of awareness of other schemes.

“We would have to look into it and see what is out there with advice from pension advisors.” (Finance Controller, Micro or small employer, Real Estate Activities, Offered salary sacrifice)

Larger employers had more of a mixed response: whilst some shared similar views to the micro or small employers, others took a more measured approach, reporting that they would identify how to balance increased costs accordingly.

Impact on current pension offer

Employers reported a range of views on how this scenario may impact their current pension offer. Some employers suggested they would stop using salary sacrifice for pensions and make alternative pension arrangements in this scenario. For example, some larger employers said they would switch to net pay contributions instead. Other employers suggested that they would switch to their pension scheme’s standard tax arrangement, or revert to the former pension arrangement used prior to salary sacrifice, although employers did not explicitly specify what these arrangements were. For example, one employer said that they would explain to their employees that this scenario would result in them incurring a “double tax” and that they would be better placed to put some of their money in an ISA.

“It would just switch to net pay contributions in the old-fashioned way.” (Pensions Administration Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

“I would remove that option and I would effectively say that you either make additional voluntary contributions through a gross scheme where you will receive tax relief, or you don’t pay into the pension scheme at all if you are only being offered salary sacrifice because it actually is a double taxation situation. Therefore you’re better off putting it in an ISA.” (Pensions Manager, Large employer, Construction sector, Offered salary sacrifice)

Employers who said they would stop offering salary sacrifice for pensions in this scenario also noted that this would bring administrative costs to the business, such as when explaining the new policy to employees or updating technical systems from salary sacrifice to not offering salary sacrifice.

“In the same way that we informed them about the salary sacrifice, we would have to go through the reverse process by telling them it’s no longer viable and the savings are no longer there and find out what they think about it.” (Senior Payroll Administrator, Large employer, Manufacturing sector, Offered salary sacrifice)

Similar to the first scenario, there was a recognition amongst some employers that this scenario would affect all employers using salary sacrifice for pensions and therefore may not necessarily have a huge impact on business competitiveness. Given this universal impact, some employers also recognised that there may be less pressure to increase pay to account for this loss in wages but felt they had somewhat of a responsibility to do so, which would incur additional costs for the business.

“It wouldn’t just be our company, it would have an effect on everybody, making employee retention and stuff like that harder.” (HR Manager, Micro/small employer, Agriculture, Mining & Utilities sector, Offered salary sacrifice)

“If it’s a governmental change then the onus is not on the business to pay higher salaries to make up this loss of net wages but you feel like you should so it would cost the business more…” (Finance Controller, Micro/small employer, Wholesale and Retail sector, Offered salary sacrifice)

Some smaller employers indicated a lack of understanding when reflecting on this scenario, which they considered would make salary sacrifice pensions equivalent to a standard pension scheme. On this basis, these employers felt that they would continue to offer salary sacrifice for pensions even with the additional costs, as changing the pension arrangement would not result in them being better off.

Other impacts

Employers did not identify many other impacts of this scenario, besides the impact on their current pension offer. Some employers did acknowledge the administrative burden of switching to an alternative pension arrangement – this was something that was more commonly mentioned by micro or small employers, rather than larger employers, who said they would need to speak to advisors on which pension arrangement they should switch to.

Similar to the first scenario, some employers noted that they would have to find ways to cover the loss of the NI savings, which could lead to increased prices. Given the difference between the first 2 scenarios is an increase to the additional charges employees would face, employers’ consideration of other impacts remained broadly the same across the first and second scenarios.

Employer expectations of employees’ responses

In general, employers recognised that, if salary sacrifice worked in this way, the most likely outcome could be that employees would reduce the amount of salary sacrificed to counteract the increase in NI and income tax, where they were contributing above the Automatic Enrolment minimum, although some employers reported more extreme responses, such as employees ceasing to contribute to the workplace pension at all if their pension worked in this way.

“If it cost them another £560…they already moan about how much tax and national insurance gets taken from them…That’s living in England!” (Finance Controller, Medium employer, Manufacturing sector, Offered salary sacrifice)

Employers also had concerns that this scenario would exacerbate any negative feelings their employees had towards their pay in general. For example, one employer noted that their employees already felt underpaid and incurring the income tax and NI charges in this scenario would simply further this feeling.

“Staff are always wanting a pay rise and it would increase that sentiment. Staff at the moment still feel they’re underpaid and I think it would just heighten that.” (Managing Director, Medium employer, Services sector, Offered salary sacrifice)

5.3 Hypothetical scenario 3

The third scenario removed only the NI exemption for salary sacrifice pensions beyond a threshold of £2,000 per year. This would mean that employers and employees would not need to pay NI on any salary sacrificed up to £2,000 but would need to pay NI on any salary sacrificed above this amount.

For an employee earning £35,000 who has reduced their salary by 5%, the annual amount of salary sacrificed would fall below the threshold so no additional NI would need to be paid. However, if the employee earned a higher wage, meaning their 5% contribution was over £2,000, or the employee opted to sacrifice an amount greater than £2,000, then this would result in an employer and employee NI charge on the salary beyond that threshold in this scenario.

For example, for an employee earning £45,000, reducing their salary by 5% would result in £2,250 of salary sacrificed per year. The £250 above the £2,000 threshold would therefore be liable to employee and employer NI. Consequently, when compared to a salary sacrifice arrangement in its current format, an employee earning £45,000 would pay an additional £30 in NI and the employer would pay an additional £34 in NI. Table 6.3 shows the difference.

This change to NI would only affect employer contributions that are provided via salary sacrifice. Any employer contributions provided outside of salary sacrifice would continue to be exempt from NI. This scenario would not impact overall pension relief provided by the government. Employee contributions would continue to be exempt from Income Tax using other pension mechanisms.

Table 6.3 Scenario 3’s impact on employer and employee costs

	Baseline situation with salary sacrifice	Scenario 3: Removal of NI relief on salary sacrificed contributions above a £2000 threshold
Employees gross salary	£42,750 (£2,250 sacrificed)	£42,750 (£2,250 sacrificed)
Employee contribution to pension	£0	£0
Employer contribution to pension	£3,600 (8%)	£3,600 (8%)
Income Tax to be paid	£6,036	£6,036
Employee NI to be paid	£3,622	£3,652
Employer NI to be paid	£4,644	£4,678
Net loss for employee	N/A	-£30
Net loss for employer	N/A	-£34

Initial reaction to the scenario

As with the first and second scenarios, understanding of this scenario was broadly good. However, some confusion remained: when asked how it would impact their current pension offer, some employers referred to reverting back to ‘auto-enrolment’, which is not an alternative arrangement to using salary sacrifice.

Employers generally responded to this scenario most positively of the 3, with some noting that, due to the level of their staff wages, it would have minimal impact on their business. Some employers also acknowledged that they could introduce a different pension contribution arrangement for employees above the threshold, should they request it.

“That’s a slightly easier pill to swallow. Thinking about the people we’ve got here; it would affect 7 or 8 people. Maybe for those we could find an alternative solution for, because at that level we’re talking about directors and the senior management team.” (Head of Personnel and Finance, Micro or small employer, Construction sector, Offered salary sacrifice)

However, most employers were still concerned that this scenario resulted in a reduction of benefits and that, regardless of earnings, it could disincentivise saving for a pension. A common response from employers was that, despite this scenario not impacting many employees due to the wage threshold, there was a concern that changing the rules around salary sacrifice for pensions may inevitably cause confusion and risk people becoming more disengaged with pensions. This was felt this to be especially true for younger people who are less concerned with what their pension entails at an early stage of their career.

“Employees and taxpayers would be very cynical about any tax changes unless they are overtly for their benefit, and I think it would be yet another tweak that they won’t understand, turning more people off the subject of pensions.” (Owner, Micro/small employer, Finance sector, Offered salary sacrifice)

“The more you change a product, and the benefits people get, the less attractive they become.” (Managing Director, Micro/small employer, Finance sector, Offered salary sacrifice)

Impact on current pension offer

In this scenario, most employers considered salary sacrifice for pensions to still be viable and suggested they would not stop offering it. They therefore did not present an alternative, although did state that they would likely still conduct a review of salary sacrifice for pensions to understand whether it was still a viable arrangement. Although not a common finding, some employers indicated they would consider changing their current pension offer in this scenario. When asked to provide more detail on the potential alternative offer, some employers demonstrated limited understanding by referring to ‘auto enrolment’, although other employers said they would move to net pay contributions.

Some employers sympathised for higher earners who would be hit, whilst others responded more positively to this scenario given most of their employees would not meet the threshold and would therefore be unaffected. In general, employers felt individual employees would not be hugely affected by the additional charges in this scenario, as those on lower wages who would be most affected by any tax increases would not be included. Therefore, they did not feel as though there was a need to switch to an alternative pension arrangement.

Employers who predominantly employed higher earners were generally understanding of the (rationale or purpose of) scenario, despite acknowledging that it would have a significant impact on some of their employees. These employers recognised that, if salary sacrifice for pensions worked in this way, then the affected employees would be more financially able to take on this additional charge.

“Our situation, you know what with our average salary in the north of £85,000, it would have a significant impact on both the company and the individual - but again, you know that is simply because our average salary is so much higher than the numbers that are being quoted here.” (Pensions Manager, Large employer, Construction sector, Offered salary sacrifice)

However, some employers with higher earners said they may introduce a tiered system in this scenario, to provide salary sacrifice for pensions for those that fall under the threshold and a different system for those above it, to ensure that their higher earners would be able to avoid the additional costs. 

Other impacts

Employers generally saw this third scenario as the most favourable of the 3 scenarios, but some employers highlighted there would be additional administrative burdens associated with it. For example, some employers noted that this scenario was the most complicated of the 3 scenarios and showed some frustration at the added burden of calculating the impact of salary sacrifice for each employer, acknowledging that they did not want to manage different systems.

“I think there’s a significant cost of the organisation to update our systems to be compliant with the scenario you’ve just described.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

Some employers were also concerned about how they would calculate wages, and therefore the amount of salary sacrificed, which could change between months due to bonuses, overtime pay and other factors. They recognised that this scenario could result in a substantial administrative burden on behalf of the finance team who may need to adjust payments accordingly month to month.

“We have several different elements of pay that attract pension contributions and therefore there will be different factors that are sometimes variable. For example, outside of the base salary, whether somebody’s earning a bonus, whether they are earning overtime, means that from time-to-time people will dip over the £2,000 threshold.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

Some large employers said there could be an additional administrative burden of offering multiple pension arrangements under this scenario.

“We’d have to reconfigure all our payroll systems and all our documentation. It would be a big job.” (Pensions Administration Manager, Large employer, Manufacturing sector, Offered salary sacrifice)

Employer expectations of employees’ responses

Compared to the previous 2 scenarios, many employers felt they could talk with their employees more reasonably about this scenario and that there would be a greater understanding on their part of why it may be introduced, since it would be higher earners impacted by the change.

However, employers did raise concerns that any employees impacted would not be happy with the effect it had on their take-home pay, and that they would lose the NI savings during a cost-of-living crisis that is affecting everyone, including higher earners. One employer was concerned that any system where half the workforce incurred a charge whilst the other half did not could lead to bitterness between colleagues.

“Once you start treating people differently you get in fighting in the workforce…if you treat people different and they don’t fully understand the reasons why…it will cause hassle and issues…” (Financial Controller, Micro/small employer, Wholesale and Retail sector, Offered salary sacrifice)

Some employers felt that employee frustration could also be exacerbated where employees had fluctuating income close to the threshold in this scenario, where an increase in income over the threshold could feel like it was counteracted by the NI charge. These employers explained that this could be confusing for employees, preventing them from understanding exactly when they would be charged and when they wouldn’t be.

“We’d have to explain to our employees why their payslip is going to be varying so much when as far as they’re concerned, their earnings haven’t moved materially.” (Chief HR Officer, Large employer, Manufacturing sector, Offered salary sacrifice)

Echoing the previous 2 scenarios, some employers noted that people can already be cynical about taxes and their pension, meaning that this scenario could have a negative impact on employees’ morale and perceptions of the government appearing to use underhanded methods to raise revenue.

“They are looking at how they can increase their revenues without putting the rates of tax and national insurance up…Trying to increase revenue through the back door for HMRC.” (Financial Controller, Micro/small employer, Real Estate Activities, Offered salary sacrifice)

5.4 Chapter summary

All 3 hypothetical scenarios were viewed negatively to some degree by employers. Common reactions from employers were that they would have to properly assess the additional costs and compare them against other pension arrangements before deciding whether or not they would stop offering salary sacrifice for pensions.

Employers had concerns about any loss of savings, which would feel like additional costs, and the impact of these would need to be carefully considered. Employers’ expectations of how their employees could react in all scenarios included a negative impact on staff morale and that employees may reduce the amount of salary sacrificed, where the salary sacrifice arrangement remained in place.

6. Conclusions

This research aimed 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 NI relief) on pension salary sacrifice arrangements may impact employers’ motivations and attitudes towards these arrangements.

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.

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1. In September 2022, the government announced that the 1.25 percentage point rise in National Insurance would be reversed from November 2022. ↩

2. Where employers mentioned company cars, the OpRA rules state that company cars in general are not included although ULEVs are. Employers in this research did not specify the type of vehicles offered to employees. ↩

3. A stealth tax is a tax levied in a way that is largely unnoticed, or not recognized as a traditional tax. ↩