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

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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.