Salary sacrifice ‘could be pension tax relief victim’

Salary sacrifice for pension contributions could be banned in the national budget to head off its use by higher earners to beat the introduction of flat-rate tax relief, employee benefits consultancy Portus warns.

The schemes – which minimise National Insurance contributions for employers and employees and are currently used mainly by lower and middle earners – will become attractive for higher earners for pensions if flat-rate tax relief is introduced.

But Portus believes the chancellor could ban the use of salary sacrifice in order to stop higher earners beating the expected move to equalise tax relief at a rate between 25% and 33%, with potential implications for wider use of salary sacrifice.

Potential pension rule changes could include making all employer pension contributions subject to National Insurance contributions, saving around £8 billion a year, or cutting the Annual Allowance further from its current £40,000.

Portus Consulting Commercial Director Steve Watson says: “People are forgetting that higher earners can simply pay contributions via salary sacrifice and still receive effective higher rate tax relief as a way round the equalisation.

The pension tax benefits from salary sacrifice come from the employer taking responsibility for all contributions in return for employees taking a lower salary – the same principle applies for other uses of the system, such as childcare vouchers.

In practice employers and employees can negotiate remuneration structures or employment contracts to suit themselves and there are limits to how much the government can intervene, Portus says.

Although the Chancellor could surprise us on 16 March with an immediate change, Portus believes the earliest date any changes should come into effect is 6 April at the start of the new tax year, although April 2017 may also be possible.

The consultancy offers an online service called RetirePort, which provides a retirement planning solution for employers and staff, as it specifically calculates the tax benefits for staff.