What can employers take from HMRC’s pension salary sacrifice research?

There were 51 businesses of different sizes interviewed by the researchers in 2023. Of these, 41 businesses offered pension salary sacrifice arrangements to their employees and 10 did not.

Employers who were operating salary sacrifice for pensions viewed the arrangement as beneficial for themselves and their employees due to the NIC savings. They also thought it to be advantageous in employee recruitment and retention.

Employers who were not offering pension salary sacrifice cited the additional administration required, their small business size, and lack of knowledge of it, as reasons. Some of these businesses were operating salary sacrifice for other benefits.

Three hypothetical changes were posed to the employers currently offering pension salary sacrifice arrangements for their views:

• Removal of NIC exemption for employers and employees on the salary sacrificed;
• Removal of NIC exemption for employers and employees, and removal of income tax exemption for employees on the salary sacrificed; and
• Removal of NIC exemption for employees only on salary sacrificed above a £2,000 per year threshold.

All three scenarios were anticipated to have a negative impact on employee morale, and to possibly cause further disengagement of employees around pensions as changes risk introducing more confusion.

In response to scenarios one and two, employers noted that they would need to review the costs involved to decide whether or not to continue to offer pension salary sacrifice. However, some employers recognised that the administrative burden of looking at and implementing an alternative scheme would be a barrier to making any changes.

Scenario three was viewed by employers surveyed as the most favourable of the options, with some employers being largely unaffected by this change due to the level of staff wages. For context, where an employee sacrificing 5 percent of gross salary to their pension earns in excess of £40,000, employee and employer NIC would begin to fall due. However, it could significantly increase the complexity of administration for other businesses who may need to operate different systems for different populations of employees.

Whilst three hypothetical scenarios were posed to the businesses, comments were not invited in this section of the research on maintaining pension salary sacrifice in its current form.

As the research shows, concerns over the perceived additional administration required can prevent some employers from implementing salary sacrifice schemes. However, most of the employers in this study found the arrangements to be easy to administer once set up. Working with an external advisor can ensure that your scheme is set up as efficiently as possible.

Some employers noted that whilst the NIC savings were seemingly absorbed into general business running costs, they were indirectly funding employee costs such as wages and employer pension contributions. As National Minimum Wage (NMW) continues to rise, these savings may become increasingly important for businesses. Employers who do not currently offer pension salary sacrifice may want to take advantage of any NIC savings currently available.

Whilst the scenarios posed in the research regarding the variations to the tax and NIC reliefs appear to be hypothetical, it is worth employers using this as an opportunity to review any existing salary sacrifice arrangements to understand what NIC savings are being made and how these are being utilised.

Our multi-disciplinary team of legal, tax, payroll, NMW, pension auto-enrolment and employee benefit specialists is here to help you review your employee pension arrangements. Please contact the authors or your usual KPMG in the UK contact to discuss how we can support you with your employee pension schemes.

For further information please contact:

• Caroline Laffey
• Will McGahan