Pension salary sacrifice schemes face chop in Budget
Sara White, Editor, Business & Accountancy Daily
Over 90% of employers expect the chancellor to restrict the use of popular tax breaks in pension salary sacrifice schemes at the Budget
Almost half (49%) of businesses think restrictions are ‘quite likely’ while 45% consider them ‘very likely’, found a survey of mid-market businesses by BDO. Only 1% of respondents thought Rachel Reeves will leave the current tax break alone.
In salary sacrifice schemes, employees forgo part of their salary which the employer pays instead into their pension as an enhanced pension contribution. This arrangement offers national insurance contribution (NIC) savings for both employer and employee, as the sacrificed salary and employer contributions are exempt from both income tax and NIC.
Use of these schemes has become more attractive since the chancellor hiked employer NI in last year’s Budget, which has hit job creation with both John Lewis and Aldi reporting the negative impact of the measure in their latest results in the last few days.
The survey results followed an HMRC research paper released in May, which suggested salary sacrifice pension schemes could be in the chancellor’s sights.
HMRC examined various hypothetical scenarios to gauge employer reactions to potential changes, including removing the NIC exemption completely for staff and employers, and setting a threshold for salary sacrificed at £2,000.
Caroline Harwood, head of employment tax at BDO said: ‘It’s clear that employers are bracing themselves for reform. Indeed, HMRC’s survey from earlier this year suggested that changes to pensions salary sacrifice schemes are under active consideration.
‘Tax reliefs on pensions are costly. The most recent figures show that the cost of NIC tax reliefs from contributions to, and benefits from, registered pension schemes reached £23.5bn in 2023-24. Meanwhile the cost of income tax relief for registered pension schemes reached £28.5bn in the same period.
‘However, the challenge for the government is how to restrict relief on pensions without discouraging people from saving enough for their future.’
With the Treasury struggling to fill a perceived black hole in the government’s coffers, it is likely that generous tax reliefs would be a quick win, although it will hit business and individual taxpayers hard, the latter supposedly the ‘working people’ the chancellor pledged to protect from tax rises in the Labour manifesto.
But if salary sacrifice was reformed, the government could take a staggered approach without removing the benefit completely in a single swoop.
‘One approach could be to limit the NIC exemption to say £2,000 to £5,000 of total salary sacrificed for all benefit types,’ suggested Harwood.
‘One other, perhaps simpler, option, would be to keep the salary sacrifice system as it is but impose a simple levy on pension fund values. This could be done by adding a small percentage to the annual charges. A small levy of say 0.25% would hardly be noticed by pensions savers and could be easily collected by pension fund managers.
‘Whatever path the government chooses, some changes to pensions taxation at the Budget look very likely.’
The Budget will be held on Wednesday 27 November.
