Allowing ‘salary sacrifice’ to help higher rate tax pension payers should be abolished, as HM Revenue and Customs classifies it as tax avoidance, according to the Tax Incentivised Savings Association.
Speaking at a Tisa conference on the pension tax relief consultation earlier this week, Charles McCready, programme director for The Savings and Investment Policy project (TSIP), laid out the industry group’s proposals to the government in response to the consultation on taxing pensions.
TSIP’s recommendation to the Treasury’s green paper was to consider new mechanisms to help dissuade employers and employees from using ‘salary sacrifice’.
Salary sacrifice is an arrangement which enables employees to boost their existing pension contributions, where employees give up part of their salary, which the employer then pays into the employee’s pension, along with their contribution to the scheme. Both the employer and employee will pay lower national insurance contributions.
Mr McCready explained that salary sacrifice is a ‘loop hole’ that is adopted quite widely and could be closed as a means of providing savings to the Treasury, on the basis that the chancellor could be looking for the taxation of pensions to be a contributor to his assault on the deficit.
If it is to be withdrawn, then appropriate measures would be required to ensure that employees and employers do not find alternative means of resurrecting the arrangement in other forms.
A HMRC spokesperson responded that any change in the rules is a matter for Treasury, adding that salary sacrifice arrangements are becoming increasingly popular and the cost to the taxpayer is rising.
“The government announced at the summer Budget that it will actively monitor the growth of these schemes and their effect on tax receipts.”
The policy group also said it was against moving towards an ‘Isa-style’ ‘taxable-exempt-exempt’ system. Mr McCready said that it makes pension saving more expensive for both employees and employers, acting as a disincentive.
He told FTAdviser that this system would remove the natural mechanism that stops people spending their pension pots too quickly after retiring, pointing to the Australian example where many have run out of money within 10 years.
Mr McCready also pointed out that the TEE system creates an audience that in retirement will make the heaviest use of public services, after having paid nothing for them through tax.
“Plus it would mean a significant pay cut for those in public sector defined benefit schemes, which would not be popular,” he added.
However, this conflicted with research commissioned by TSIP and carried out by the Wisdom Council, which found that 68 per cent pre-retirees prefer to pay tax now and take it tax free later.
Giles Lenton, head of customer insight, commented that people just do not understand the more rational argument, so the industry and government must “communicate to motivate”.
TSIP agreed with this point, stating that most people just do not understand tax relief, but they are keen on the idea of matching contributions; regardless of the actual level.