Pension Salary Sacrifice Schemes Likely to Be Cut in Upcoming Budget

Salary sacrifice pension schemes could face new restrictions in the upcoming Budget, with over 90% of employers expecting changes to the current tax reliefs. The government is reportedly considering limiting or reforming the NIC exemptions that make these schemes attractive to both employers and employees.

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As the Autumn Budget approaches, concern is mounting among UK employers that pension salary sacrifice schemes may soon face reform. According to a recent survey of mid-market businesses, more than 90% of employers believe the Chancellor is likely to restrict the popular tax breaks associated with these schemes — a move that could have far-reaching implications for businesses and their employees alike.

Under salary sacrifice arrangements, employees agree to give up part of their gross salary in exchange for an equivalent employer pension contribution. This structure offers significant savings, as the sacrificed salary and employer pension contributions are exempt from both income tax and National Insurance contributions (NIC). The arrangement benefits both sides: employees boost their pension savings while employers reduce their NIC costs.

However, since last year’s increase in employer NIC rates, the government has been scrutinising the cost of these reliefs. The latest HMRC data shows that NIC tax reliefs related to pension contributions and benefits reached £23.5 billion in 2023–24, while income tax reliefs totalled £28.5 billion. With Treasury finances under strain, these generous reliefs could soon be curtailed as part of a broader fiscal tightening.

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A recent HMRC research paper explored potential reforms, including removing the NIC exemption entirely or capping the amount of salary that can be sacrificed — with one scenario setting a limit as low as £2,000. Employers are already preparing for possible changes, fearing that any reform could increase payroll costs and reduce employee take-home pay.

Experts suggest that the government may pursue a phased approach rather than a complete overhaul. One option could be to limit the NIC exemption to a fixed amount (for example, between £2,000 and £5,000) across all benefit types. Another could involve introducing a small levy on pension fund values — a subtle adjustment that could raise revenue without significantly impacting savers.

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Whatever the eventual decision, it’s becoming increasingly clear that reform is on the horizon. Balancing the need to protect public finances while encouraging long-term saving remains a challenge for policymakers, particularly given the Chancellor’s pledge to shield “working people” from further tax rises.

The Autumn Budget is scheduled for Wednesday, 27 November, and all eyes will be on the Chancellor’s announcement to see how far-reaching these pension tax changes might be.

Get in touch with Naail & Co for tailored advice on how potential Budget changes to salary sacrifice and pension tax relief could affect your business or personal finances.