Is the axe coming down on pensions salary sacrifice? Ahead of any Budget announcement, there is inevitably always speculation about what the Chancellor may include. And this year’s Autumn Budget, due to be announced on 26 November, is certainly no exception.
This week, we have seen a great deal of speculation around the future of pensions salary sacrifice and the government’s potential plans to cap the tax-free amount that can be sacrificed to £2,000 a year. Under current rules, there is no limit on the value of contributions that attract tax relief under a salary sacrifice arrangement.
Not surprisingly, the news has been met with a great deal of outcry. While it is yet to be confirmed, such a move could have such significant ramifications that several organisations within the industry have called upon the government to engage with them about the implications of this ahead of the Budget announcement.
If the government was to cap the tax relief on contributions made through salary sacrifice, this could result in increased costs for both employers and employees, with higher earners being most affected. For example, some of the calculations I have seen this week indicate that someone earning £45,000 per annum, who sacrificed 5% of their salary, would pay £30 more while their employer would pay an additional £34.
Further up the pay scale, an individual earning more than £125,000 a year, sacrificing 20% of their salary, could pay £460 more while their employer would pay an additional £3,450, according to figures from accountancy firm RSM.
The loss of employer NI savings could also have implications for other areas of reward and benefits. Many organisations, for example, use the savings generated from pensions salary sacrifice arrangements to fund other benefits schemes or future increases in pension contributions. Only time will tell whether employers would be able to fund these via another method should tax relief be capped on salary sacrifice.
The move could also impact how much people save for retirement. A poll conducted by the Association of British Insurers (ABI) found that 21% of the just over 2,000 respondents would reduce the amount they save via a salary sacrifice arrangement, while a further 17% would stop using salary sacrifice completely if contributions via this method became subject to higher tax.
While we will have to wait until 26 November to find out whether this speculation will come to fruition, I’m baffled that the government would even consider measures that counter its aim of encouraging individuals to save for a better retirement. The minimum contribution requirements under auto-enrolment are already acknowledged to be insufficient for savers to achieve an adequate income in retirement, so surely anything that discourages workers from boosting their savings will only serve to worsen the pensions crisis in the long term?
Debbie Lovewell-Tuck
Editor
@DebbieLovewell
