The extent to which the Chancellor’s decision to close holiday pay schemes in his first pre-Budget report shows he is not prepared to tolerate solutions offered to employers that go against the grain of what Parliament intended. Whether this most recent assault on National Insurance avoidance gives a hint as to what the Government is thinking on salary sacrifice remains to be seen.
That salary sacrifice, and its place in a world where employers are compelled to offer staff a set contribution into their pensions, presents a conundrum to employers is well-known. If even half of the 7m people the Government expects to sign up to personal accounts opted for an exempt scheme on a salary sacrifice basis then the short term loss of NI to the Treasury would be huge. But many advisers are treating such theories as speculation.
Holiday pay schemes were a good deal for all concerned and a lot of advisers were excited about them. Until they were killed off in the pre-Budget report, holiday pay schemes marked one of the slicker weapons in the armoury of the good corporate IFA.
Advisers could pay for all sorts of attractive new benefits for employers by setting up a switch to a holiday pay scheme, and mainstream companies such as Nationwide, WH Smith and Boots had all put schemes in place. Now the break has gone but the fact that no-one is complaining about it shows the move was widely expected. But experts point out that holiday pay schemes are a different class of tax break to salary sacrifice for pensions.
“Holiday pay schemes are a different kettle of fish,” says Nigel Dumbrill, flex consultant at Aon. “They were initially set up for the construction industry and were used by other industries because the legislation was poorly written. Salary sacrifice does not work in the same way and I have heard talk of it being removed on the eve of so many Budgets now yet it never happens.”
Dumbrell points out that salary sacrifice is far more embedded into UK legislation and would require a lot more effort to change. Michael Whitfield, managing director of thomson online benefits agrees. He says: “This is not a tax law issue, this is an employment law matter, so I cannot see how tax legislators can take it away. It is my right as an employee to negotiate with my employer to be paid less and receive more pension. If you speak to the Revenue about salary sacrifice schemes they will always say it is an employment law issue rather than falling under their domain.”
Tom McPhail, head of pensions policy at Hargreaves Lansdown says the risk to salary sacrifice raised by personal accounts may being overstated, as the sorts of people going into the state-sponsored pension scheme will not be working for the types of businesses that are comfortable with dealing with arrangements like salary sacrifice. Quite the reverse in fact.
“Salary sacrifice is most beneficial for big lump sum payments and for higher rate taxpayers. It can be a pain to administer and is messy, so whether it would be appealing to companies paying contributions into pension schemes for the first time seems unlikely,” says McPhail. “This is maybe a reason why the Government does not need to worry about this issue just now.”
To remove salary sacrifice for pensions would certainly go against the grain of what the Government has been saying with regard to protecting existing provision. The nightmare scenario for those working in the workplace environment is that the tax break is removed and because pensions is the core benefit at the heart of flex schemes, all the good work that has been put in in this area by the industry in recent years could be set back.
But Richard Sheppard, head of pensions at AWD Chase de Vere thinks salary sacrifice is not out of the woods just yet. “Salary sacrifice is becoming a tricky area,” he says. “It has been in the Treasury’s sights for some time now and with a new Chancellor in Number 11, he seems to be wanting to save costs wherever he can. Let us not forget that the main beneficiaries from salary sacrifice are higher rate taxpayers and Labour is a party whose core vote is with basic rate taxpayers.”
Sheppard points out that higher rate tax relief for pensions generally has moved onto the political agenda, with the LibDems calling for its abolition. While abolishing it across the board would be hugely unpopular, its limited use in salary sacrifice could be politically acceptable.
Speaking to Corporate Adviser this month, pensions reform minister Mike O’Brien would not confirm that salary sacrifice is safe, saying that there are issues that the industry has to deal with in the run up to personal accounts.
Having a story to tell around how to use tax rules is one of the most powerful tools available to advisers. Ministers need to understand that tax advantages provide the psychological key to getting companies to provide financial security for their employees.