Chancellor Philip Hammond could make further changes to salary sacrifice schemes and remove pensions from the current exemption in tomorrow’s Budget.
Currently, employers can offer their workers the choice to make pension contributions via a salary sacrifice arrangement.
This enables both to benefit from a national insurance saving, as the pension contribution is paid gross before national insurance or tax is deducted.
According to Esther White, senior associate at law firm Charles Russell Speechlys, this has been a “particularly attractive option as employers have been coming to terms with the requirements of pensions auto-enrolment."
She said: “As minimum pension contributions rise - to 5 per cent in total from April 2018 and 8 per cent in total from April 2019 - this will be an increasingly important means of softening the increasing costs that will be incurred and thereby encouraging pension savings.”
Last year the chancellor’s first Autumn Statement targeted salary sacrifice schemes, making most of them subject to the same tax as cash income.
Nevertheless, pensions, pensions advice, childcare, Cycle to Work and ultra-low emission cars were made exempt from the changes to the salary sacrifice taxation, which came into force this April.
Ms White argued, however, that “there is a growing risk that it [pensions salary sacrifice] will again come under threat”.
She said: “The savings for employers and employees – particularly attractive for standard rate tax payers due to how national insurance rates are calculated - represents a tax loss to the Exchequer and therefore a potential source of revenue for the government.”
According to Rachel Vahey, product technical manager at Nucleus, being able to salary sacrifice a pension “is a really valuable benefit for millions of employees which have this arrangement with the employer”.
She said: “What it means is that people can save more for their retirement, so if pensions were removed from the scope of salary sacrifice, it would have a knock-on effect on many people that are the moment doing the right thing.
“To take this away would surely dent their savings for later life.”
Ms Vahey argued that a change in this area is possible, but not probable.
She said: “It is always an area that is under review from the Treasury, and they are very aware of the advantages that are given.
“It was recently consulted on, and I don't think that anything major happened since then which would change this situation.”
Other changes are also expected in tomorrow’s Budget, such as a cut in the annual or lifetime allowance.
There is also an expectation that the government might make changes to the national insurance exemption on employer pension contributions, or on the defined benefit ratio valuations.
maria.espadinha@ft.com
