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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.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. Well, firstly Salary Sacrifice will still be worthwhile for higher rate tax payers because they’ll receive the benefit of full tax relief on their contributions as they’re made as opposed to having to reclaim half of it at a later date and that’ll mean more money actually invested.

    Also, if the sums that both employers and employees have to pay on salaries are merely translated from NIC to some sort of tax, the latter will still be saved by reducing salaries.

    Thus, I don’t see why changing NIC into tax is going to invalidate Salary Sacrifice.

  2. David Trenner - Intelligent Pensions 24th March 2011 at 9:34 am

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

    So hardly relevant just now!!

  3. I think it is a great idea to merge them and would love to see it come in sooner rather than later.

    Can’t see why it should be so difficult to achieve if there is a real desire to do it.

    Would have thought the hardest part is selling it to the man in the street that a higher income tax rate as a result of merging the two isn’t really an increase in tax!

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