What changes to the pension salary sacrifice scheme could mean for you?
A new report from HMRC has raised concerns around changes to the pension salary sacrifice scheme.
A report on workplace pensions by HMRC has fuelled speculation around changes to salary sacrifice schemes.
The report looked into employers’ behaviours and attitudes on salary sacrifices and looked into how potential reforms to tax reliefs could change these.
So what exactly is salary sacrifice, and how could an overhaul affect you?
What is salary sacrifice?
The clue is in the name – employees give up a portion of their salary in return for a non-cash benefit from their employer. This can take the form of pension contributions, but also Cycle to Work schemes, company cars, or insurance.
By doing so, you reduce your salary, so it’s a useful way to avoid fiscal drag and reduce the amount of tax you pay.
“Since the advent of auto-enrolment, many employers have used salary sacrifice to fund pension contributions,” says Kate Smith, head of pensions at Aegon. “Interest in these arrangements has surged following April’s hike in employer NICs from 13.7 per cent to 15 per cent, alongside a sharp drop in the earnings threshold from £9,100 to £5,000.”
“Salary sacrifice allows employees to exchange part of their salary for non-cash benefits, such as pension contributions, in a tax-efficient manner,” Smith adds. “These contributions are exempt from income tax and NICs, making them attractive and more affordable for both employers and employees.”
Is HMRC considering a salary sacrifice overhaul?
The study that’s just been released was initiated in 2023. It consisted of interviews with over 40 businesses that offered salary sacrifice arrangements for pension contributions, and 10 businesses that did not.
The study is clear that the report presents only the authors’ views, and not HMRC’s. Nevertheless, there have been concerns raised among industry participants.
“Speculation over tax changes could raise worries for people’s pensions,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. “There are questions around the future of salary sacrifice schemes for workplace pensions. This would cut the tax-efficiency of these schemes, which runs the risk of persuading employers to make their pension offering less generous.”
What would a salary sacrifice overhaul mean for you?
Increasing your pension contribution through salary sacrifice can help ensure you have sufficient funds in retirement.
Changes to salary sacrifice could impact pension savings if the tax incentive is altered, affecting the amount workers are willing to contribute towards their retirement.
A chunky salary‑sacrifice arrangement can change your P60 figures and sometimes trigger a self‑assessment. TaxScouts pairs you with a qualified accountant who’ll run the numbers, fill in the return and file it for a fixed fee. Useful piece of mind if you’ve just slipped below the £100k personal allowance taper or want to be sure HMRC has the full picture.
“This is a private HM Revenue & Customs consultation initiated in 2023 and it’s far from certain that the Treasury has any intentions around salary sacrifice, but it’s not the first time that SS has come under the spotlight as a potential area for shoring up the tax take, and given the pressures on the public purse it would be surprising if no one in Government was looking at this report,” says Gary Smith, financial planning partner at wealth manager Evelyn Partners.
“Making pension contributions via salary or bonus sacrifice is a popular option for those whose earnings might fall into the 60 per cent tax trap, a zone between £100k and £125,140 where the combination of high-rate tax and a tapered reduction in their tax-free personal allowance leads to a highly punitive marginal income tax rate, which for many families is worsened by the withdrawal of child-care benefits,” adds Smith.
“The fault here lies with an unfairly structured income tax and benefits system that penalises people in this situation disproportionately for increasing their earnings,” he says. “Removing a perfectly legitimate mitigation strategy – increasing pension contributions via SS – would seem harsh without reforming the disincentivising tax step itself.”