Does pension tax relief U-turn pave the way for salary sacrifice reform?


Abandoned plans for reforming pension tax relief could push the Chancellor towards cracking down on salary sacrifice in tomorrow’s Budget.

At the last Budget, in July 2015, the Government said it would “actively monitor” the growth of schemes, which allow firms and employees to reduce their National Insurance bills, as the “cost to the taxpayer is rising”.

Earlier this month the Government hinted it had dropped plans for the radical pension Isa, leaving George Osborne with billions of savings to find.

Liberty Sipp director John Fox says: “Salary sacrifice is the soft underbelly of pensions and could be where we see Osborne’s claws could come out. People are not going to be out protesting, it’s a nice quick clean one for him. He can say the people taking advantage of salary sacrifice tend to be the high earners.”

Royal London business development manager Fiona Tait agrees scrapping salary sacrifice would be “relatively easy politically because not many people understand it”.

But she warns there could be legal hurdles.

“‘At the moment in order to have salary sacrifice in place you need a legal contract. You could say we won’t have any more of these schemes set up on this basis but there are other things – which they are less likely to touch – where people give up their salary for benefits like childcare. There’s also the difficulty of some cases where it is written into employee contracts.”

The Chancellor could decide to limit, rather than abolish, salary sacrifice, as recommended by Work and Pensions committee member and Conservative MP Craig Mackinlay.

Earlier today the committee called for a flexible state pension age to help women born in the 1950s who say they were not given enough time to plan for a steep rise in their state pension age.

However, a move restricted to this group might cause outrage if not extended to all pensioners and cost the Treasury billions as state pension payments are brought forward.

Tait warns people could lose out if they decide to take their state pension early when they do not need to.

She says: “The simplest solution would be to allow early access to that affected group on the basis of reduced payments if taken early – and it would be fiscally neutral because payments would also be reduced.

“But it also provides a disincentive for people who don’t need it now and they would affectively lock themselves into a lower rate.”

Dentons director of technical services Martin Tilley adds there is still room for the Chancellor to tinker with the existing tax relief system and that further reform may simply have been delayed.

He says: “We might see the annual allowance go down as low as £30,000 or further reductions in the lifetime allowance, anything that gradually keep costs under control. And then he might still bring in a pension Isa in 12 or 18 months’ time. The only problem is the savings he makes will not come in time for 2020 election.”