Sacrificing Salary Sacrifice

In last week’s article, we looked at forthcoming legislative changes that will bring pensions inside of the estate for IHT purposes. This week, we examine another area of pensions where the government are proposing changes: salary sacrifice. This is particularly relevant for those studying towards the CII R04, R06, and AF5 and AF8 units.

This article is correct as at 24 February 2026 and is relevant to examinable tax year 2025/26.

It’s probably safe to say that recent government policy initiatives are unlikely to make pension provision any more appealing. While the abolition of the lifetime allowance initially boosted hopes of higher savings into pensions, this was quickly dampened by the cap on tax-free cash at £268,275 (for those without lifetime allowance protection) and the loss of the IHT exemption from April 2027. The latest blow is a move against salary sacrifice arrangements.

Salary Sacrifice and Its Benefits

Salary sacrifice has been a popular way to boost pension saving, allowing employees to exchange salary for employer pension contributions in a tax-efficient way, avoiding national insurance contributions (NICs) for both parties. This resulted in higher pension contributions with no change to net income, and in some cases, contributions were increased further by employers rebating their NIC savings.

Conditions Required for Salary Sacrifice to Be Effective

It should be noted that there are conditions required to be fulfilled for salary sacrifice to be effective:

• a variation to the employee’s contract is required to reflect the lower salary;
• the agreement must be in place before any salary is sacrificed;
• the sacrifice cannot reduce salary below the minimum wage.

Once entered into, the arrangement also cannot normally be revoked unless an entirely new contract is issued.

Potential Downsides of Salary Sacrifice Arrangements

It should also be noted that there have always been a number of potential downsides to salary sacrifice arrangements, mainly that:

• salary is reduced for the purposes of additional earnings-related employment benefits;
• the reduced earnings can potentially impact entitlement to contributory State benefits;
• eligibility for credit can be impacted by the lower gross salary and net income.

The Impact of the Recent Budget Announcement

However, the recent Budget announced that salary sacrifice pension contributions above £2,000 per year will be subject to both employer and employee NICs. The net result will be a reduction in the amount paid into the pension, as employee contributions will be subject to NICs and employers will inevitably no longer be able to add their rebate.

Implications for the Pensions Sector and CII exams

While specific details remain unclear and the changes are not due until 2029, the measure is unlikely to strengthen a pensions sector already struggling, with various studies suggesting that the average pension pot sits at less than £100,000 in the UK. Nevertheless, salary sacrifice is a common subject tested in CII pension exams and candidates, especially at Advanced Diploma level, will be expected to stay abreast of forthcoming changes.

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