Salary sacrifice schemes could be banned in Budget

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Salary sacrifice schemes could be banned in Budget

Salary sacrifice schemes may be banned in the Budget to prevent higher earners using them to avoid taxation on pension contributions.

According to employee benefits consultancy Portus, salary sacrifice schemes will become increasingly attractive to high earners if a mooted flat rate of tax is announced by the Chancellor this month.

Currently the schemes are used by lower and middle earners to minimise national insurance contributions, but Portus said if an expected move to equalise tax relief at a rate between 25 per cent and 33 per cent goes ahead, they could become popular with the better paid as a way to get around the change.

High earners, who currently enjoy tax relief at their higher marginal rates of tax, would be worse off under a lower flat rate of relief.

Steve Walton, commercial director at Portus Consulting, said: “People are forgetting that high earners can simply pay contributuins via a salary sacrifice and still receive a higher rate tax relief as a way round the equalisation of relief.

“It may well be that the chancellor takes the opportunity to make other benefits subject to national insurance and effectively stop or dramatically reduce the advantages of salary sacrifice across the board.”

Michael Roberts, director at Protect and Invest Chartered Financial Planners, said: “This does indeed seem like an obvious loophole, I can only assume that where an individual has received higher rate relief through salary sacrifice or the net pay arrangement, they will need to declare it on their tax return and pay an equivalent tax charge.

“It will be interesting to see what the announcements are, and whether higher rate relief is indeed removed as has been suggested.”

lucinda.borell@ft.com