HM Revenue and Customs published a study on employers’ attitudes towards removing tax exemptions from workplace pension schemes administered via salary sacrifice.
The research paper Understanding attitudes and behaviours towards salary sacrifices for pensions was commissioned two years ago by the previous government. It was completed in January 2024 by IFF Research on behalf of HMRC, but only published yesterday.
Researchers asked employers about their attitudes towards the current situation, but also examined their reactions to three “hypothetical scenarios” where salary sacrifice tax exclusions are removed.
The fieldwork was conducted in summer 2023, and included interviews with HR and financial professionals from 41 employers who offered salary sacrifices for their workplace pensions as well as 10 firms that didn’t.
Salary sacrifice was a popular option among employers who said it helped retain staff. Some employers said that they transferred the savings from national insurance to their employees. Others said the firm simply took the savings as an employment cost.
Researchers tested three hypothetical reform scenarios among interviewees.
- The salary sacrificed will be subject to NI charges both for the employer and the employee.
- Employers will no longer be exempt from NI, while employees and their income tax will still receive exemptions.
- The NI exemption will be removed, but only for salary sacrifices above a PS2,000 threshold per year.
Researchers found that employers had the most negative views of the second scenario. Some said that this would eliminate the benefit and they would not know if they should continue with salary sacrifices for pensions. The third reform scenario was the most popular.
Employers generally indicated that changing pension systems could cause confusion and increase the risk of people disengaging from pensions.
Steve Webb is a partner in the LCP consultancy and a former Liberal Democrat MP and pensions minister. He said, “It’s very revealing that HMRC paid for research on the likely reaction of employers if the salary sacrifice for pensions was scaled back.”
“Even though the research was ordered under the previous administration, the desire for additional revenue today is even more intense.
This research indicates that salary sacrifice is likely to be considered by the government as a possible revenue-raising measure.
Webb predicted last autumn that Rachel Reeves would subject pension contributions by employers to a national security charge. The Autumn Budget didn’t include this reform but it did include increases in employers’ national insurance charges that were implemented last month.
Jonathan Watts-Lay is the founder director of Wealth at Work. He described yesterday’s salary sacrifice scenarios as “stealth taxes”.
He said: “It’s bad for everyone.” The fundamental problem with all these scenarios, whether they are just doing national insurance or both national insurance and income taxes, is that less money will be going into pensions unless people increase their contributions.
You’re telling someone that they either have to pay more or continue to work and their retirement pot will be smaller. It has no positive effect. “They either suffer through the pain of retirement or endure the pain while they are working.”
A spokesperson for HM Treasury stated: “These claims were totally speculative. HMRC commissions independent research into all aspects of taxation. “We are committed to keeping tax rates as low as we can for workers.”
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