- Higher earners can use salary sacrifice to beat pension tax relief flat rate, Portus says
- RetirePort service enables employees to monitor tax charges and benefits
Salary sacrifice for pension contributions could be banned in the Budget to head off its use by higher earners to beat the introduction of flat rate tax relief, leading employee benefits consultancy Portus warns.
The schemes – which minimise National Insurance contributions for employers and employees and are currently used mainly by lower and middle earners – will become attractive for higher earners for pensions if flat rate tax relief is introduced.
But Portus believes the Chancellor could ban the use of salary sacrifice in order to stop higher earners beating the expected move to equalise tax relief at a rate between 25% and 33% with potential implications for wider use of salary sacrifice.
Potential pension rule changes could include making all employer pension contributions subject to National Insurance contributions saving around £8 billion a year or cutting the Annual Allowance further from its current £40,000.
Portus Consulting Commercial Director Steve Watson says: “People are forgetting that higher earners can simply pay contributions via salary sacrifice and still receive effective higher rate tax relief as a way round the equalisation of tax relief.
“It may well be that the Chancellor takes the opportunity to make other benefits subject to National Insurance and effectively stop or dramatically reduce the advantages of salary sacrifice across the board.”
The pension tax benefits from salary sacrifice come from the employer taking responsibility for all contributions in return for employees taking a lower salary – the same principle applies for other uses of salary sacrifice such as childcare vouchers.
In practice employers and employees can negotiate remuneration structures or employment contracts to suit themselves and there are limits to how much the Government can intervene, Portus says.
The consultancy, which advises more than 170 clients across a wide range of sectors, offers an online service RetirePort which provides a retirement planning solution for employers and staff as it specifically calculates the tax benefits for staff.
Although the Chancellor could surprise us on 16th March with an immediate change, Portus believes the earliest date any changes should come into effect is the 6th April at the start of the new tax year although April 2017 may also be possible.
RetirePort provides individual guidance to employees and an online portal where they can track where they are with their pension funding alongside other investments, including property to provide a total retirement planning overview.
Employees can use the portal to outline scenarios and the impact on how they decide to take retirement income. They retain access to the service if they leave their job. Employers benefit by offering enhanced guidance and financial education to staff which will improve engagement with retirement planning.