Autumn Budget: How could Rachel Reeves change salary sacrifice rules?
Salary sacrifice schemes have allowed Brits earning more than £100,000 to avoid high taxes since the 1970s.
While a pay rise can be lucrative for some employees, for others being dragged over the £100,000 threshold can be financially damaging, particularly for parents of young children who risk having their free childcare hours pulled away and those who wish to put off repaying student loans.
The schemes allow employees to give up a portion of their salary for other benefits, such as childcare vouchers and electric vehicle grants, reducing their total income and ultimately their income tax bill.
However, for many the most popular salary sacrifice is pension schemes, where employees agree to pay cuts in exchange for higher pension contributions, pushing them back below the threshold.
Potential changes to salary sacrifice
The tax advantages of salary sacrifice schemes could be pared back in the upcoming Autumn Budget, after new reports Chancellor Rachel Reeves is drawing up a £2bn raid on UK retirement savings.
Under the new plans, the exemption is expected to be capped at £2,000 per employee per year, meaning any further contributions will be subjected to standard national insurance rates of eight per cent on salaries under £50,270 and two per cent on any income above that.
The move comes as the Chancellor looks away from cutting the 25 per cent tax free lump sum after public backlash over the impact the decision would have on pensioners.
The Treasury is scrambling to fill an estimated £20bn fiscal black hole in public finances, after failing to withdraw the winter fuel payment and reform welfare following public backlash earlier this year.
Blow to savers and employers
Cuts to salary sacrifice benefits would increase the financial pressure on employers and damage retirement savings, in particular with more employers showing interest in schemes, after national insurance contributions were hiked in April.
Mike Ambery, retirement savings director at Standard Life, said: “By limiting the amount of income that can be sacrificed without paying national insurance, the government will be increasing the cost of pension contributions to both the individual and the company if the level of contributions is maintained.
“Ultimately, the impact of national insurance being paid will be felt in employees’ pockets with less take home pay and in employers’ payroll with higher costs.”
But, there are other ways to build up a retirement pot and cut income tax bills.
ISAs to the rescue
ISAs grant a £20,000 tax-free ceiling per year, allowing savers to dodge both income tax and capital gains tax.
Capital can be placed into cash ISAs, which remains the UK’s most popular product, or invested into a stocks and shares ISA.
But the Chancellor is also rumoured to be mulling a slash to the cash ISA allowance to £10,000 in the Autumn Budget, in a bid to stop people from hoarding cash and boost economic growth.
For Brits considering stepping onto the housing ladder, a lifetime ISA is a viable option, offering a tax free cash wrapper, and a 25 per cent government bonus on what is put in, maxing at £1,000 a year.
However, unauthorised withdrawals, those not used for a house purchase or retirement, comes with a penalty of a 25 per cent charge on money withdrawn, meaning a loss of the government bonus.
Londoners may also look to consider another option as the acc £450,000 price cap has failed to keep pace with rising house prices in the capital and if a home over that amount is purchased using a LISA it is subjected to a 6.25 per cent withdrawal charge.
Hearing wedding bells
Married couples can also transfer some of their income tax allowance to their partner.
People earning under the £12,570 personal allowance who have a spouse that is a basic rate taxpayer can gift £1,260 of their allowance.
This could relieve Brits of the 20 per cent tax on the sum, amounting to a potential saving of up to £252.
Moving assets between spouses can also be done without paying tax, allowing those who have already used their tax free ISA allowance to move capital without worries of fees and come back under the threshold.
Personal allowances can also be used to earn interest tax-free if not already used on wages, pensions or other incomes.
Business owners
While business owners may also be worried about the impact of salary sacrifice changes, there are ways for them to cut their income tax bill as well.
This includes leveraging tax-efficient schemes, such as the Enterprise Investment Scheme which grants 30 per cent income tax relief on investments for companies which meet the criteria of being unlisted, UK based and having less than 250 employees among other requirements.
Sole traders can also consider incorporating as a limited company as corporation tax rates, which stand at 25 per cent tax for profits over £50,000, can be lower than some high rate income tax bands.