Employee Benefits Reassessed Amid Salary Sacrifice Changes
Employers are beginning to reassess employee benefits ahead of major changes to salary sacrifice rules due from April 2029. Salary sacrifice has long been one of the most effective ways for employees and employers to make tax and National Insurance savings, particularly where employees exchange part of their gross salary for enhanced pension contributions. However, the forthcoming cap on National Insurance relief is now prompting many organisations to review the cost and structure of their employee benefits packages.
Key Points
- Employers are reassessing employee benefits ahead of salary sacrifice changes due from April 2029.
- Only the first £2,000 of employee pension contributions made through salary sacrifice will remain exempt from National Insurance.
- GRiD research suggests 23% of employers may reduce pension contribution generosity, while 22% may cut other employee benefits.
- The IFS has warned that the changes may add complexity while mainly affecting higher earners and private sector employees.
- Employers are likely to focus more heavily on employee benefits that deliver measurable outcomes, such as absence reduction and wellbeing support.
- Gallup data shows UK employee engagement remained at just 10% in 2025, with stress and manager disengagement also significant concerns.
What Is Changing?
As we highlighted in a recent article, from April 2029, only the first £2,000 of employee pension contributions made through salary sacrifice each year will remain exempt from National Insurance. Amounts above that threshold will be subject to standard employee and employer NICs. The change does not prevent employees from saving more into their pensions, but it does reduce the tax efficiency of doing so through salary sacrifice.
This matters because salary sacrifice has become a central part of many employee benefits strategies. It is commonly used for pension contributions and may also sit alongside other employee benefits such as electric vehicle schemes, cycle-to-work arrangements and group protection. While those other employee benefits are not directly affected by this specific pension cap, the additional payroll cost is leading employers to reconsider employee benefits budgets more broadly.
The Institute for Fiscal Studies (IFS) has questioned whether the reform will materially improve the pension tax system. Its analysis found that the change will mainly affect higher earners and private sector employees. Overall, around 15% of employees currently make salary sacrifice pension contributions above the £2,000 threshold, rising to 48% among the top 10% of earners. The IFS also found that 18% of private sector employees are above the threshold, compared with 7% in the public sector. While the reform is expected to raise revenue, the IFS warned that it may add complexity and does little to address wider inconsistencies in the National Insurance treatment of pension contributions.
Employers Reviewing Employee Benefits Packages
New research published by GRiD has found that a significant minority of employers are already considering reductions. Around 23% expect to reduce the generosity of pension contributions, while 22% anticipate scaling back other employee benefits. A further 15% say it is too early to determine how they will respond.
That reaction is understandable. If employer costs rise, some organisations may try to offset the additional burden by reducing pension enhancements, narrowing benefits eligibility, or prioritising only those employee benefits that clearly support workforce resilience. However, cutting employee benefits too quickly could create retention, morale and recruitment risks, particularly where employees already see benefits as part of their total reward.
Quality Over Quantity
The challenge for employers is therefore not simply whether to reduce employee benefits, but which benefits continue to justify their cost. In a more constrained environment, employee benefits that deliver measurable outcomes are likely to come under less pressure than those with limited usage or unclear value.
That may increase the importance of employee benefits linked to absence reduction, early clinical intervention, financial protection, return-to-work support and employee wellbeing. Group protection, occupational health access, preventative health services and structured rehabilitation support may become more important if they help reduce absence, support productivity and protect employees during illness or injury.
A More Strategic Approach
The salary sacrifice changes do not mean that workplace benefits are becoming less important. If anything, they require employers to take a more strategic approach. Rather than offering a broad package for appearance’s sake, employers will need to focus on employee benefits that align with workforce needs, business objectives and measurable outcomes.
The likely direction is therefore towards more selective, evidence-led benefits design. Employers that review their schemes early, communicate clearly with staff and focus investment on benefits that deliver practical value will be better placed to manage the 2029 changes without undermining employee support.
Employee Engagement Falls
Employee engagement remains extremely weak in the UK, according to Gallup’s State of the Global Workplace 2026 report. In 2025, only 10% of UK employees were engaged at work, below the European average of 12% and significantly below the global average of 20%. Gallup’s UK data also shows that engagement has effectively flatlined in recent years, remaining at 10% in 2022, 2023, 2024 and 2025.
The global picture is also deteriorating. Gallup found that worldwide employee engagement fell to 20% in 2025, its lowest level since 2020 and the first time engagement has declined for two consecutive years. It estimates that low engagement cost the world economy approximately $10 trillion in lost productivity, equivalent to 9% of global GDP.
The UK figures are particularly concerning because they sit alongside wider indicators of workplace strain. Gallup found that 46% of UK employees experienced significant stress the previous day, compared with 39% across Europe and 40% globally. This suggests that low engagement is not simply a morale issue, but part of a wider productivity, wellbeing and management challenge.
A key theme in the report is the declining engagement of managers. Gallup found that manager engagement has fallen by nine percentage points since 2022, with the sharpest annual drop occurring between 2024 and 2025, when it declined from 27% to 22%. This matters because managers play a central role in setting expectations, supporting teams and shaping day-to-day employee experience.
For employers, the message is clear. Engagement cannot be treated as a soft HR metric. Low engagement affects productivity, retention, absence, wellbeing and workplace culture. In a period of rising employment costs and greater scrutiny of employee benefits, organisations will need to focus on management quality, communication, workload, wellbeing support and whether employees feel connected to the purpose and direction of the business.
Employers: What This Means
- Employers should review employee benefits packages before the April 2029 salary sacrifice changes take effect.
- Any reduction in pension contributions or wider employee benefits should be assessed against retention, morale and recruitment risks.
- Benefits that support absence management, return-to-work outcomes, financial protection and wellbeing may become more important.
- Low engagement should be treated as a business risk, with management quality, workload, communication and wellbeing support requiring closer attention.
