There will still be a need for salary sacrifice whether employee NICs are scrapped or not, according to the guests on the latest episode of the FT Adviser podcast.
Ian Cook, chartered financial planner at Quilter Cheviot, Tom Selby, director of public policy at AJ Bell and Susan Hope, IFA workplace senior manager at Scottish Widows, discussed what could happen if employee national insurance was abolished in line with the current government's long-term ambitions.
Chancellor Jeremy Hunt has already made two consecutive cuts to employee NI in the past two fiscal events with the rate now sitting at 8 per cent.
But there have been rumours circulating that Hunt may decide to abolish NI altogether, and with a general election on the horizon this may be the headline grabbing change the Conservatives are looking for.
But what would the long term implications of this be, especially for pensions and salary sacrifice, which allows employees to lower their NI bill by contributing a part of their gross salary to their pensions. And what could potentially replace employee NICs?
Hope said: “Salary exchange (or salary sacrifice) is the fairytale of the pensions industry. Everyone involved in salary exchange lives happily ever after, the employee takes more money home in their take home pay or they get more into their pension, the employer has a cost saving which can be redirected to retain and attract staff and the adviser has a real role to play here.
“Even with a reduction in NI, there is still a compelling story for salary exchange. There is a real misunderstanding from people about higher rate tax relief with lots of people not claiming it.
"So salary exchange more than just the NI saving gives people the correct rate relief at outset and that’s absolutely key, whether employee NI goes or not.”
Cook agreed there was still a huge need for salary exchange even if NI were to be cut.
“Coming from someone who deals more on the consumer and client end, the ability for a client to make a pension contribution and forget about [it] and not necessarily to do a tax return.
“That simplification, even if NI were to be eradicated, there is still a huge need for salary exchange. It is such a useful tool,” he added.
However, Selby pointed out if NI were to be cut, salary sacrifice would become less financially attractive because people would be putting less into their pensions as a result of the cut.
He said: “However, even if NI were to be cut, you will still have employer NI and I’m sure lots of employers would be even more forthright about sharing their savings with employees if we got to a world where NI is abolished which I do think we are a long way away from.
“So even if it were to be cut, yes it would be less financially attractive but many people will still choose to do it.”
To hear more about the importance of salary sacrifice and why the industry should refer to it as salary exchange, as well as how to get younger people interested in saving into their pensions, click the image above.
alina.khan@ft.com
