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Could scrapping salary sacrifice be a bridge too far for Osborne?


The pensions industry is wary about potential changes to salary sacrifice and says the Government faces a political challenge if the regime were to be scrapped altogether.

Last week, former pensions minister Steve Webb told Money Marketing he thought salary sacrifice “could go” in the July Budget.

He said: “The Conservatives have said they aren’t going to raise tax rates, so they have to raise some serious money from somewhere.

“I have never understood why governments allowed salary sacrifice in the first place.”

Speaking at a conference held by employee benefits firm Secondsight last week, Webb added: “If you are a Chancellor who apparently wants governments not to borrow and you still need bucket loads of cash, one thing you might do is say salary sacrifice costs £15bn and make some changes.”

But pension experts say the Government’s “tax lock” pledge not to raise income tax, VAT and National Insurance will make hitting employers and employees with extra payments a hard sell.

The cut would also fall hardest on lower earners at the same time the Government is trying to encourage higher rates of saving.

Towers Watson senior consultant David Robbins says: “Politically it’s a completely different proposition to tweaking tax relief for higher earners.

“However annoying it is for the industry, those reforms only effect a relatively small number of people at the top. It’s not millions of ordinary people, who would be affected if you ban salary sacrifice.”

Robbins argues those calling for an end to salary sacrifice need to be clear what is at stake. He says the issue is whether the ban would apply to contract variation, where salary is exchanged for higher pension contributions, or whether a ban would apply non-contributory schemes or imposing NICs on employer contributions.

He adds: “You could say we’re going to slap NI on employer pension contributions, that would be quite a big measure. It would mean lower take home pay for just about everyone and a higher jobs tax on all employers. Economic theory says over time employers will recoup that cost through lower wage growth.”

Robbins says scrapping salary sacrifice is “not undoable” but “there’s lots of reasons why they would be very cautious”.

But Standard Life head of pensions strategy Jamie Jenkins says the move would be less complicated than other proposals.

He says: “It’s probably less complicated than say going to a flat rate of tax relief. There you’re breaking the link between income tax and tax relief, which complicates things.

“The tricky bit is those using salary sacrifice are probably making savings at the lower end, while at the higher end of the tax bracket it’s the employer making most of the savings. The popularity test will be the difficult bit – there would be a strong revolt from employers who are already getting hit with the removal of contracting out next year.”

Fidelity Worldwide Investment retirement director Alan Higham notes the impact on defined benefit schemes also needs to be considered.

He says: “If there’s an employer contribution funding the DB scheme’s deficit, does that suffer NI? The company would say this deficit exists in respect of our former employees, not current employees, so it’s not related to any current employment.”

But he admits the Conservatives’ pledge not to touch headline rates could force them to review pensions taxation.

He says: “How are we going to find substantial sums? It’s going to be in these nuanced areas, and the public doesn’t really understand pensions. Pensions are quite vulnerable to change.”

Any move to scrap salary sacrifice would come at a time when the lifetime allowance is set to be cut from £1.25m to £1m next year, as well as plans to taper the annual allowance for those earning over £150,000.

Adviser view

Michael Roberts, director, Protect and Invest Financial Planners

Scrapping salary sacrifice would diminish a benefit that can be quite useful for certain people. It is sending mixed messages: on the one hand you’re wanting to encourage people to save more through auto-enrolment and on the other hand you’re taking away an advantage of one of the methods of doing so.



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Steve Osbiston 19th June 2015 at 2:41 pm

    Ending Salary Sacrifice opens the door to reduce tax relief on contributions to basic rate only

  2. What is to stop an employer putting in a nil ee contribution scheme ? Until they can solve this challenge salary sacrifice cannot be done away with

  3. the nature of this consideration depends on by what is the term ‘salary sacrifice’ referring to – the technical process is a transaction where salary is exchanged in favour of other benefits and whilst pensions are commonly the beneficiary, child care vouchers, bike to work schemes etc all essentially use this premise.

    Whereas if someone opts to forgo a bonus and instead receives a pension payment – this isn’t salary sacrifice. Neither is an employer who commences a pension scheme with EEr contribution – but the inference from this (and similar) articles is that these may be in the cross hairs of the Gvt looking to up ‘tax take’ whilst having tied two hands behind its back.

    Scrapping ‘proper’ salary sacrifice would (I suspect) impact on a relatively small number and as JP points out, the work around is simply to re-jig a scheme on that basis (so the staff loose a bit of flexibility but those funding still get the same tax breaks).

    Watering down the tax effectiveness of EEr contributions, however, would have a significant impact on everyone given Auto Enrollment… which leads to the question …. what greater incentive can there be to joint an employers pension scheme but to leave the member with a NI liability on money they’ve not yet got?

  4. This will only work for large firms. If done in the right way it is entirely undetectable in a small or flexible firm and therefore unenforceable.

  5. Is there any reason to worry about this other than the word of a nobody ex-MP who represents an obscure minority party? Might as well have a lengthy debate about the Monster Raving Loonies’ proposal to make the Lifetime Allowance purple.

  6. Julian Stevens 22nd June 2015 at 4:02 pm

    I agree with Harry Katz. Then again, look at it this way. It could be argued that salary sacrifice is merely a reverse pension contribution sacrifice arrangement (I’ll have more pay instead). How (as a government) do you police that unless you decree that all pension contributions are fully NI’able?

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