Salary sacrifice is a popular way to boost your pension and save on National Insurance.

Employers allow staff to take a supposed 'pay cut', but the money gets ploughed into their pension or put towards some other benefit like childcare instead, and both sides pay less NI as a result.

Paying more into your pension can also push you into a lower income tax bracket - whether you do it via salary sacrifice or not - and can help you put off repaying student loans, or allow you to carry on receiving child benefit,

Many companies, particularly larger ones, offer salary sacrifice schemes to their employees because they are a mutually beneficial, perfectly legal NI dodge.

That has inevitably prompted speculation that the cash-strapped Government might try to crack down in the Budget on 26 November.

HMRC has carried out research, initiated under the previous Government and published in the spring, on employers' experiences of and attitudes to salary sacrifice. Some took this as a sign tighter rules were on the Treasury's radar.

So, how does salary sacrifice work and what might change if Chancellor Rachel Reeves decides to rein it in to save money.

What is salary sacrifice?

Workers agree to pay cuts in exchange for higher pension contributions or other benefits such as childcare, workplace nurseries and bicycles.

This allows both employers and their staff to reduce their National Insurance payments.

Bumping up pension contributions can reduce your income tax bill. whether you do it via salary sacrifice or independently.

'Salary sacrifice substitutes pension contributions for earnings, so employees "get back" their National Insurance as well as income tax,' says Gary Smith, financial planning partner at Evelyn Partners.

'It’s arguably the case that it’s of more benefit to basic-rate taxpayers because, at 8 per cent on earnings in the basic-rate band, National Insurance tends to make up a higher proportion of their overall tax liability, compared to higher and additional rate taxpayers, who pay an extra NI of just 2 per cent.'

A Scottish Widows survey of 1,000 employers across many sectors found 38 per cent of large firms with 250-plus staff run salary sacrifice schemes, 34 per cent of medium-sized firms with 50-249 employees offer them, and 20 per cent of small firms do so.

How might salary sacrifice be overhauled?

Pension consultant LCP says the Government is far more likely to cap salary sacrifice than to scrap it.

This is because scrapping salary sacrifice would hit millions of basic rate taxpayers, whereas capping the amount you can sacrifice, at for example £2,000, would only affect those who could afford to put that much in, including the employer contribution.

Financial services firm AJ Bell says the Chancellor is likely to be looking at a wide range of options ahead of the Budget, including possible changes to salary sacrifice.

It points out any saving to the Government from ending pension salary sacrifice would come from NI.

AJ Bell suggests people with children who earn over £100,000 might look at other ways to reduce income to avoid the punitive effect of high tax rates and the loss of childcare funding. This could include measures such as making further pension contributions or even moving to a four-day week.

Clampdown would be a blow to savers and employers, say money experts

Cuts to salary sacrifice benefits would put financial pressure on employers and could lead to worse retirement savings outcomes for individuals, according to Aegon's head of pensions Kate Smith.

More employers have shown interest in setting up salary sacrifice arrangements since the hike in their National Insurance contributions last April, she says.

'Salary sacrifice allows employees to exchange part of their salary for non-cash benefits, such as pension contributions, in a tax-efficient manner.

'These contributions are exempt from income tax and NI contributions, making them attractive and more affordable for both employers and employees.

'Any move to reduce or remove the benefits of salary sacrifice would be a blow to both employers and pension savers, potentially leading to lower retirement savings outcomes. It could also impact the government’s growth agenda if there was a reduction in contributions flowing into growth assets.'

Gary Smith, of Evelyn Partners, says: 'Salary sacrifice is a very efficient and effective way for employees to save into pensions.

'It seems inevitable that watering it down – or dismantling it altogether - would hit pension saving, not just because the tax incentive would be diluted but also because faith in the pension system would be dented by more Government interference.'

He adds: 'Making pension contributions via salary or bonus sacrifice is a popular option for those whose earnings might fall into the 60 per cent tax trap, a zone between £100,000 and £125,140 where the combination of high-rate tax and a tapered reduction in their tax-free personal allowance leads to a highly punitive marginal income tax rate, which for many families is worsened by the withdrawal of child-care benefits.’

Smith says the fault here lies with an unfairly structured income tax and benefits system that penalises people in this situation disproportionately for increasing their earnings.

'Removing a perfectly legitimate mitigation strategy - increasing pension contributions via salary - would seem harsh without reforming the disincentivising tax step itself.'