Sarah Jackman

Following the UK’s Budget announcement, much attention focused on the proposed £2,000 cap on salary sacrifice pension contributions – particularly on cost modelling, scheme design and reward strategy.

However, from an employer’s perspective, this is only part of the picture. Changes to tax and pensions do not operate in a vacuum. They often quickly influence employee behaviour in ways that tend to impact HR, line managers and payroll long before any formal changes take effect.

Employers focusing solely on the technical mechanics of salary sacrifice risk missing the people consequences that are already emerging in practice.

Working less in response to tax thresholds

In response to where tax brackets now sit relative to salary levels, financial planning is increasingly driving further flexible working requests. Employees are already reassessing whether full-time working makes sense once higher marginal tax rates are factored in.

For some, the answer is not increased pension saving, but rather reducing days or hours to manage net take-home pay. This is translating into an uptick in requests to move from full-time to part-time working, or otherwise to reduce hours or days worked.

While processes for considering flexible working tend to be well established, the motivation behind these requests is modifying. For many organisations, this is layering onto already increased volumes of flexible working requests following changes to expectations around office attendance and hybrid working.Accommodating this increase in requests can place pressure on teams and expose fault lines in how requests are assessed and prioritised.

Competing requests and fairness

As more employees seek to reduce working time, employers may find there are practical limits to how many reduced-hours arrangements a particular team can accommodate.

In practice, issues can arise where certain non-working days become heavily oversubscribed; earlier requests have already been approved, limiting flexibility for others; and employees perceive that some groups have benefited at the expense of others. This is particularly sensitive where reduced-hours arrangements appear to cluster around certain demographics.

Even where decisions are operationally justified, employers need to ensure they can clearly explain why some requests are accommodated and others are not. From a legal perspective, this places renewed importance on consistent decision-making; clear, evidence-based business reasons for refusal; and careful record-keeping to demonstrate how competing requests have been assessed.

Reduced-hours arrangements also require realistic assessment of how work will be covered. Employers should consider the impact of reduced hours on team workload and capacity; handovers and continuity of work; and pressure on colleagues who remain full-time.

Where reduced hours are approved without a corresponding adjustment to workload, this can store up employee relations issues that surface later on.

The rush to increase pension contributions

Alongside changes to working patterns, many employees are also reviewing pension saving, particularly in light of the existing £60,000 annual allowance. For most individuals whose income remains below the statutory taper thresholds, this represents the maximum level of pension saving that can be made each year without triggering an additional tax charge.

For higher earners, the annual allowance can be progressively tapered down, meaning the available tax-advantaged allowance may be significantly lower. This is particularly relevant where employees use salary sacrifice to reduce taxable pay, as employer pension contributions are still taken into account when assessing whether the tapered annual allowance applies.

As a result, some employees may assume they are increasing contributions safely, only to face unexpected tax charges later. Evidence shows some employees are already moving quickly to increase pension contributions, sometimes without fully understanding how the annual allowance operates, or the broader implications.

Employers must not provide financial advice, but clear and accurate internal communications are essential. Out-of-date intranet pages or generic encouragement to “maximise pension saving” can lead to confusion or complaints if employees later face unexpected tax charges.

Bonus season and one-off pension contributions

In sectors where bonuses form a significant part of remuneration, employers also need to think carefully about process. As bonus season approaches, many employees will want to explore making one-off pension contributions.

Issues commonly arise where employees are unclear whether bonus sacrifice is permitted, whether pension contributions from bonuses are permitted under the relevant pension scheme or whether the scheme can accept a one-off lump-sum employer contribution.

There may also be confusion if timescales for making elections are not well communicated or payroll teams are faced with last-minute requests that cannot be processed in time or are not compatible with scheme rules.

Even where pension contributions from bonuses are possible, employers need to be clear about the distinction between ongoing salary sacrifice arrangements and one-off employer pension contributions, and ensure any election is made before the employee has a contractual entitlement to the bonus.

Bonus-related pension contributions can also create annual allowance issues, particularly where a large one-off contribution significantly increases total pension input in a single tax year.

Employers may want to check whether their bonus communications explain whether pension contributions from bonuses are possible, set clear deadlines for making requests and
signpost information about any limits or restrictions that apply.

National Minimum Wage compliance

Salary sacrifice arrangements must not reduce an employee’s cash pay below the applicable National Minimum Wage rate. This requires ongoing monitoring, not just an initial check when arrangements are put in place. This is the case even where the employee has requested the arrangement. HMRC has the power to investigate and take enforcement action where breaches occur. In practice, investigations can be triggered by anonymous information provided via HMRC’s whistleblowing channels.

Employers should ensure they have robust processes in place to identify potential breaches before they occur and prevent pension contribution changes that would take pay below the National Minimum Wage.

Leavers and last-minute pension planning

Finally, pension contributions are increasingly featuring in exit discussions. Employees negotiating exits or settlement agreements may seek to increase pension contributions shortly before termination or to divert elements of pay into pensions.

This can raise issues around scheme rules, payroll cut-off dates and the timing of any agreement. Requests often arise where the employee already has a contractual entitlement to the payment, limiting what can be accommodated in practice.

Different elements of exit pay can also be treated differently for tax purposes and not all payments can be redirected into pensions in a tax-efficient way. Where expectations are not managed carefully, this can lead to dissatisfaction if requests cannot be implemented.

Close coordination between HR, payroll and pensions teams is essential to ensure consistency of treatment and to avoid disputes at a sensitive point in the employment relationship.

The proposed salary sacrifice cap may be several years away, but when combined with current tax thresholds its effects on employee behaviour are already being felt. For employers, this is not just a pensions or reward issue. It is a people issue, with implications for flexible working, fairness, compliance and employee relations.

Sarah Jackman is a counsel in the people, reward and mobility team at Dentons