The government’s widely anticipated plan to increase employers’ national insurance contributions could lead to a crackdown on salary sacrifice schemes as the chancellor aims to protect the extra revenue it could generate.
Rachel Reeves is expected to raise employer NICs by up to two percentage points, potentially increasing them from 13.8% to 15.8%, while also lowering the £9,100 threshold under which employers start paying the tax.
While a plan to charge national insurance on employers’ pension contributions appears to have been ditched due to fears that it could lower retirement incomes, pensions and benefits experts fear the Treasury may wish to control salary sacrifice schemes as they become a more attractive option for employers.
Gary Smith, partner in financial planning and retirement specialist at the wealth management firm Evelyn Partners said: “On the one hand, an employer NI increase would make pension schemes operating on a salary sacrifice basis more attractive to employers – which could mean more employees end up benefitting from them.
Salary sacrifice
Employers’ pension contributions could attract national insurance
“While on the other, that does raise the risk of the Budget also including a crackdown on salary sacrifice.”
Salary sacrifice is a formal arrangement between an employer and an employee whereby an employee gives up part of their salary in exchange for non-cash benefits.
The benefits are not subject to income tax or NICs so their taxable salary is reduced. Salary sacrifice pensions are a tax-efficient way for employers and employees to pay into a workplace pension.
Smith said the NIC rise could be a significant cost to employers, and possibly have a knock-on effect on hiring and remuneration plans.
Evelyn Partners’ calculations show that an employer with 100 employees with an annual wage bill of £5 million would currently have an employer NIC liability of approximately £564,000. An increase of 1.25 percentage points would increase that amount to approximately £615,500, an increase in employer NIC costs of 9.1%.
Salary sacrifice pensions
Smith believes employers will also review their benefit offering and may wish to offset some of this cost through the use of a salary sacrifice pension scheme where that’s not already in place.
If she wanted to be really aggressive, she could seek to neutralise all existing salary sacrifice arrangements, and this would raise a lot of tax” – Gary Smith, Evelyn Partners
“Despite the financial benefits to both the employer and employee, many organisations still do not operate a salary sacrifice arrangement,” said Smith. “If the chancellor increases employer NICs, these employers could look towards salary sacrifice pension schemes to reduce costs.”
Based on an increase to employers’ national insurance rate to 15.8%, an employer would currently pay NI on the full salary of each employee above the lower threshold. If the wage bill was £1 million above the lower level, this would increase the employer NI bill from £138,000 to £158,000.
“On a normal workplace pension scheme the employees would pay 5% of salary into the pension, which would be £50k in this example,” said Smith. “If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £150,100 (assuming a 15.8% rate), a saving to the employer of £7,900.”
“But the corollary of all this is that the chancellor could seek to protect the Treasury revenue from the NIC increase by restricting salary sacrifice. She could announce new legislation that stops new salary sacrifice arrangements, or include them in the assessment of employers’ NI, and this has been done previously. If she wanted to be really aggressive, she could seek to neutralise all existing salary sacrifice arrangements, and this would raise a lot of tax.”
Electric vehicles
There are also concerns that such a change could affect wider salary sacrifice arrangements, such as cars. Salary sacrifice is commonly used to help employees lease electric vehicles (EVs).
Other than avoiding a pay drop below the national minimum wage, there is currently no limit of how much of an employees’ salary they can sacrifice. Car leasing giant Alphabet, which leases a fleet of more than 700,000 vehicles, has said that any plans to change benefit thresholds could wreak havoc with providers if the numbers do not add up for customers.
Caroline Sandall-Mansergh, consultant and channel development manager at Alphabet last week called on the government to “carefully consider” making any changes to salary sacrifice to stop the industry moving into an EV recession.
“It cannot be underestimated the advantages that salary sacrifice schemes have to help people lease a new zero or lower emission vehicle,” she said.
“If employees are doing business miles or commuting to and from work, it will have a positive impact on a company’s carbon emissions’ reporting, which most companies will be required to disclose from next year.”
She added: “If you’ve got a scheme where you’re actively encouraging employees into zero or lower carbon emitting vehicles, it’s a major benefit to the company, especially those that are actively pursuing net zero targets.
“Salary sacrifice is an enabler to making that possible, so any adverse changes that make schemes less attractive are bound to have repercussions, which will contravene with the government’s own targets.”
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