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The holiday is over

After the Chancellor axed holiday pay schemes, could salary sacrifice be next?

The Chancellor’s decision to close holiday pay schemes shows he is not prepared to tolerate solutions offered to employers that look and feel like scams. It may also indicate that the days of salary sacrifice for pensions are numbered.

Holiday pay schemes were such a good deal for all concerned that I am surprised they have not been more popular. For those workplace advisers who have not set up such arrangements for their employer clients, the chance of huge National Insurance savings is now gone for ever.

Until the moment when they were killed off in the pre-Budget report, holiday pay schemes were one of the slicker weapons in the armoury of the good corporate IFA. All manner of wonderful new employee benefit arrangements could be put in place, paid for by the savings that could be made by a switch to a holiday pay scheme. Whether employers now take away existing employee benefits to pay for the removal of holiday pay schemes remains to be seen.

WH Smith and Nationwide are two companies that have run holiday pay schemes for some time. Last February, they were joined by Boots, which put in place a scheme for its 60,000 employees. Following Alistair Darling’s first pre-Budget report, these scheme will now have to be unravelled.

Under holiday pay schemes, employers could invite staff to opt out of paying Class 1 National Insurance contributions on their holiday pay and bank holidays. According to PricewaterhouseCoopers, a member of staff on £15,000 a year would save £180 a year while the saving for employers was £200 a year for each employee.

GNER, which put in place a plan last February with the approval of the Department of Transport, described its arrangement as saving the company several hundred thousand pounds a year.

Holiday pay schemes were originally introduced under statute as a way of allowing transient workers in the building trade to receive holiday pay. In the pre-Budget report, the construction industry was given a five-year reprieve and will be able to carry on with schemes for the moment but even brickies will lose this perk eventually.

Perhaps one of the reasons why these schemes have not been more popular is the cloud hanging over them. Since the tax break on home computers was removed, perks through the workplace have come under increased scrutiny. Many advisers no doubt thought that holiday pay schemes sounded too good to be true and rumours of their demise have been circulating for some time.

Communicating the benefits to employees and the potential for then having to take them away would have sounded like too much aggravation for many advisers and employers.

Unravelling schemes will present a headache for those employers and advisers that have put holiday pay schemes in place but what is perhaps more concerning is the fear that Darling will take the axe to other schemes that reduce NI. Salary sacrifice for pensions is one particular example of a scheme that could be on the way out, not least because of the advent of personal accounts.

The thousands of employers who will soon to be contributing to workplace pensions for the first time will be looking to lessen the pain by taking whatever steps they can to cut costs. The Government estimates that between five and 10 million people will sign up to personal accounts. If a substantial proportion of employers were to go down the salary sacrifice route to make the personal accounts exercise that bit cheaper, the short-term loss to the Treasury would be crippling. That has to be pushing the idea of salary sacrifice to the top of Darling’s to-do list.

Holiday pay funds are seen by the Government as a way of manipulating the tax rules and their removal will save it cash. But the Treasury must remember that having a story to tell around how to use tax rules is one of the most powerful tools available to advisers. Employee benefits are good for the efficient operation of UK plc and it is advisers that are bringing them to the wider economy, not the Government.

John Greenwood is editor of Corporate Adviser

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