Potential risks loom for workplace pension salary sacrifice arrangements as HM Revenue and Customs investigates potential adjustments
Upcoming Autumn Budget Could Alter Pension Salary Sacrifice Schemes as Revenue-Raising Measure
Pension salary sacrifice schemes, wherein employees forgo a portion of their salary for increased employer pension contributions, could undergo changes in the upcoming Autumn Budget, according to a former pensions minister.
This arrangement enables employees to lower their income tax and National Insurance (NI) obligations due to a reduced taxable salary, while employers also save on NI contributions as these are calculated based on the gross salary.
The Her Majesty's Revenue and Customs (HMRC) has release research surrounding potential cuts to pension salary sacrifice, with employers expressing concerns over the possible impact on their schemes. Steve Webb, former pensions minister and partner at pension consultancy LCP, stated that these potential shifts are "firmly on the agenda" for the Autumn Budget.
While the research was conducted under the previous government, Webb suggested the motivation to generate additional revenue today is even more pressing. "It is very revealing that HMRC has funded research into the likely response from employers if pension salary sacrifice were to be scaled back," said Webb.
With a reported budget shortfall to address in the Autumn Budget, these modifications could be considered as a potential revenue-generating strategy. The UK Treasury has been approached for comment on the matter.
In another development, a research conducted by Scottish Widows indicates that workers could potentially retire a year earlier by taking advantage of pension salary sacrifice, increasing their take-home pay and pension contributions.
HMRC's research examines employer attitudes towards hypothetical reductions in pension salary sacrifice benefits, such as removing the NI exemption for both employer and employee, impacting both parties' financial savings. Employers were especially negative about the second proposed reform, eliminating both NI and income tax breaks for salary sacrifice schemes.
In positive news, the current system is generally embraced by employers, with many of them citing benefits in employee retention as part of an attractive overall benefits package. Some employers even pass on the NI savings to their employees, though others absorb the cost as reduced employment expenses.
Given the potential changes, employers could find themselves reconsidering the viability of pension salary sacrifice schemes if reliefs are reduced or removed, affecting both their costs and the long-term retirement prospects of their employees.
- The Autumn Budget might alter pension salary sacrifice schemes, a financial strategy that allows employees to save on income tax and National Insurance while employers save on National Insurance contributions, as a potential revenue-raising measure due to the reported budget shortfall.
- Employers could reconsider the viability of pension salary sacrifice schemes if reliefs are reduced or removed, as changes in the upcoming Autumn Budget could impact both their costs and the long-term retirement prospects of their employees, considering these schemes also increase employees' personal-finance through improved pension contributions.
