29th June 2015
Andy James, head of retirement planning, Towry comments on the speculation that salary sacrifice may be reduced or axed in the Chancellor’s Emergency Budget on 8 July…
With the Government pledging prior to the Election that it will not make any rises to income tax, national insurance or VAT for the duration of this Parliament, it will need to find other ways of raising the money required to clear the deficit.
It is sadly a very real possibility that salary sacrifice may be culled or reduced in this Budget. If, as is widely predicted, pensions tax relief is reduced to an arbitrary amount – for example of 30%, a reduction on the 45% relief currently enjoyed by those earning more than £150,000 – then something would likely be done to stop workers get around this reduction by sacrificing more of their salary directly into their pension funds instead.
As you would avoid making national insurance payments, as well as reduce your tax bill, by diverting some of your gross salary into a pension scheme, the Government would not necessarily be any better off if they were to consider a pension tax relief change without taking salary sacrifice into account.
If salary sacrifice was blocked, and higher earners also had either pension tax relief or their annual allowance restricted, then they would be unable to gain the advantages they currently enjoy. For example, someone earning £200,000, sacrifices 20% of their income directly into their pension fund (£40,000). This would reduce their income to £160,000, while the £40,000 would be paid directly into a pension by the employer.
The reduction in income reduces their tax bill by £18,000, and their national insurance costs by another £800, meaning the net cost of the pension contribution is only £21,200 while they have had a £40,000 pension boost.
The annual allowance itself currently stands at £40,000 per year. If this were to be cut say to £10,000, which has been mooted, then there would be less reason to scrap salary sacrifice, as an employer would only be able to make a maximum contribution of £10,000 into your pension fund via salary sacrifice before the employee suffered tax implications anyway.
As it stands at present, salary sacrifice is an extremely useful scheme to boost not only pension contributions but also things such as child benefit, by reducing income below the threshold for reductions in benefits, and one should seek financial advice as to how to plan their finances accordingly and mitigate their tax bill.