Budget 2011: Salary sacrifice could end in NI-income tax merger

Employer salary sacrifice schemes could be in jeopardy after the Government confirmed its intention to merge National Insurance and income tax.

In Wednesday’s Budget, Chancellor George Osborne (pictured) confirmed plans to combine income tax and NI. He said the reform, if implemented, will not be extended to pensioners, who do not pay NI, and the contributory principle will be retained.

The Government plans to issue a consultation, although Osborne said the complexity of the change means it will take years to implement fully.

Experts say employers that use salary sacrifice for payment of pension contributions will be unable to do so if the reforms go ahead.

Barnett Waddingham associate Rob Thomas says: “Salary sacrifice will almost certainly end. A common method for the payment of pension contributions involves sacrificing an equivalent amount of salary so that savings in National Insurance contributions can be made on the amount of salary sacrificed. If NI does not exist because it has been merged into one overall tax, the benefits to employees and employers on salary sacrifice are lost.”

Syndaxi Chartered Financial Planners managing director Robert Reid says: “The key element missing from the Budget is whether or not National Insurance will be available for mitigation of salary sacrifice. If it is not, it is going to jeopardise these schemes for employers.”

Technology & Technical managing director Kim North says: “This could be the end of salary sacrifice as we know it. If National Insurance and income tax are merged, it is going to become a lot more complex and a lot less attractive for employers to offer salary sacrifice to employees.”