Two new surveys published by HMRC this week indicate that valuable employment perks such as salary sacrifice pension schemes and Benefit in Kind arrangements could be in the chancellor’s crosshairs ahead of the Autumn Budget.
The first survey, entitled Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions, examined a number of hypothetical scenarios to test the reaction of employers to possible changes to salary sacrifice schemes for pensions.
Under such schemes, employees give up a portion of their salary which the employer pays instead into their pension as an enhanced pension contribution. This arrangement results in employer and employee NIC savings, as the amount of salary sacrificed and corresponding employer pension contributions are exempt from both income tax and NIC.
Scenario one in the study removed the NIC exemption for employers and employees, resulting in employer and employee NIC charges on the salary that the employee sacrificed. Scenario two removed both the NIC exemption for employers and employees and the income tax exemption for employees, on the salary sacrificed. Scenario three removed the NIC exemption but only on salary sacrificed above a £2,000 per year threshold.
While employers noted that all three scenarios would likely affect employee morale, they felt that scenario three would be the easiest to ‘sell’ as there would be a greater understanding from employees as to why it was introduced.
A further survey, entitled Research with employers on Benefits in Kind and expenses looked at the prevalence among employers of offering Benefits in Kind to employees. That survey found that these were more common among medium and large employers, the most common in this group being workplace parking (39%), company cars (29%) and cycle to work schemes (23%). Around a quarter of medium and large employers said they offered Benefits in Kind through salary sacrifice arrangements (26%).
Caroline Harwood, head of employment tax at accountancy and business advisory firm BDO said:
“You can understand why the chancellor might be interested in reviewing the tax reliefs for pensions salary sacrifice schemes. The most recent figures show that the cost of NIC tax reliefs from contributions to, and benefits from, registered pension schemes reached £23.5bn in 2023/24. Meanwhile the cost of Income Tax relief for registered pension schemes reached £28.5bn in the same period.
“Previous chancellors have shied away from taking this ‘low hanging fruit’ because of the furore that changes to pensions tax causes – and because saving for retirement has generally been seen as something to encourage.
“One subtle way the chancellor could feasibly seek to cut some of this cost would be by limiting the NIC exemption to say £2,000 to £5,000 of total salary sacrificed for all benefit types – after all the self-employed cannot benefit from this perk. However, such a change would still be unpopular and reduce incentives for employers to offer salary sacrifice schemes and for employees to make suitable provision for their retirement. It would also add new burdens on employers who would have to calculate the excess if people went over the threshold.
“Employees currently using Benefit in Kind incentives through salary sacrifice schemes could also lose out if the current incentives were reduced. This could have a particularly big impact on those taking advantage of such schemes to lease Electric Vehicles – another arrangement previously encouraged in the context of the path to Net Zero.”
