Changing salary sacrifice ‘could cut take-home pay for millions’

Changing salary sacrifice arrangements could lead to employees being paid less, experts have warned.

Salary sacrifice allows employees to exchange part of their salary for pension contributions, reducing both employee and employer National Insurance costs. 

And according to the Society of Pension Professionals (SPP):

• around one in three private sector employees use salary sacrifice for pension contributions
• nearly 10% of public sector workers benefit from it

But speculation is growing ahead of the Budget on 26 November that salary sacrifice could be abolished or reformed.

The SPP is concerned that abolishing or reforming could have multiple consequences.

For example:

• employees would see lower take-home pay, especially those earning under £50,284
• employers would face increased payroll and benefits costs
• pension participation could fall, undoing progress made since auto-enrolment
• a fall in employee morale

The SPP has now written to all MPs to warn that changing the rules could have negative consequences for both employers and employees.

This comes after a study by HMRC found that employers widely support salary sacrifice and consider it an important way to help people save for later life.

As a result, many said they believe changing or removing the arrangement would cause confusion, reduce the perceived value of pensions as a benefit and ultimately leave employees with less money.

The research outlined three possible scenarios for restricting salary sacrifice and in each one, employee morale was negatively affected.

“Changing salary sacrifice arrangements would lead to a reduction in take home pay for millions of employees who are saving into a workplace pension,” said Steve Hitchiner, chair of SPP’s Tax Group.

“It would also represent another sizeable cost to employers, despite the chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”