Provider Zurich has warned ahead of the Budget that savers on lower incomes would be disproportionately hit by a move to abolish salary sacrifice for pension contributions.
Chancellor George Osborne may use this afternoon’s (16 March)n Budget to announce a change to salary sacrifice arrangements.
But Zurich has warned basic rate taxpayers signed up to salary sacrifice schemes could be worse off if Mr Osborne scraps the benefit.
People use salary sacrifice schemes to minimise their income tax and national insurance payments.
Employers pay into their staffs’ pensions or other perks, and employees accept a lower salary in return.
Both employers and employees save on NI contributions and it can have tax benefits too.
Some estimates put the cost of salary sacrifice schemes to HM Treasury at £14bn a year.
For example, at present, it costs basic rate taxpayers £68 to save £100 into their pension, £58 for higher rate taxpayers and £53 for additional ratepayers.
However, if salary sacrifice was abolished, basic rate taxpayers would need to increase their contributions to £80 to save £100, while for higher and additional rate taxpayers this would only increase to £60 and £55.
Iain Mills, operational taxes director for Zurich UK Life, said what is key to note today is the chancellor may have postponed a root and branch reform of pension tax relief but he could still cut other valuable benefits.
“Ending salary sacrifice would be a blow to people on all incomes but would disproportionately hit basic rate taxpayers who the government should be encouraging to save more.
“Higher rate tax payers would still receive almost as much tax relief - 40 per cent rather than 42 per cent - whereas basic rate taxpayers would see their rate plummet from 32 per cent to 20 per cent. This would leave basic rate taxpayers 12 pence in every pound worse off.”
Mr Mills said the government should be doing all it can to encourage employers to increase contributions into their employees’ pensions, thereby boosting employee engagement in saving, especially where there is a matching arrangement in place.
“Removing salary sacrifice would place additional financial and administrative burdens on employers. Implementing any reforms would also be highly complex, especially as arrangements are written into many employment contracts, and could be difficult for HMRC to police.”
Claire Trott, director and head of pensions technical at Talbot & Muir, said if salary sacrifice is abolished it will be a real detriment to savers and as they say, having to pay national insurance on these contributions will mean that those hit hardest will be basic rate tax payers.
“Salary sacrifice is something that has been feared to be at risk for some time and the announcement that the major pension tax relief reforms are at least postponed may mean that its days are numbered.
She added the implications for employers who operate schemes on this basis are huge, with many of them having spent time and money building payroll systems to cope and have also started to give back some of their national insurance savings to the employees as additional contributions.
“This would mean additional cost and hassle for the employers and even more money lost from pension schemes that could be benefiting their employees in the long run. The removal of salary sacrifice would be another blow to the incentives for pensions savers.”
ruth.gillbe@ft.com
