HM Revenue and Customs has published research into employers’ attitudes to removing tax exemptions for workplace pension schemes administered through salary sacrifice.
Commissioned two years ago under the previous government, the research paper, Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions, was completed by IFF Research for HMRC in January 2024, but was only published yesterday.
Researchers asked questions about attitudes to the situation as it currently stands, but also explored employers’ reactions to three “hypothetical” scenarios where salary sacrifice tax exemptions were removed.
Fieldwork took place in summer 2023 and involved interviews with HR and finance professionals at 41 employers that offered salary sacrifice for their workplace pensions and 10 firms that did not.
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Employers that offered salary sacrifice were positive about it, saying they thought it helped to retain employees. Some said they passed on the employer’s national insurance (NI) savings to their employees, but others said it was simply absorbed by the firm as a reduced employment cost.
The researchers tested three hypothetical scenarios for reform among interviewees:
- Removing the NI exemption for employer and employee, resulting in NI charges for both on the salary sacrificed
- Removing the NI exemption for employers, and NI and income tax exemptions for employees.
- Removing the NI exemption but only on salary sacrificed above a £2,000 per year threshold.
The researchers found that employers were most negative about the second scenario, with some saying this would wipe out the benefit, and that they would be unsure whether to continue to operate salary sacrifice for pensions. The most favourably viewed reform was the third scenario.
Generally, employers indicated that changing the pension system could inevitably cause confusion and risk people becoming more disengaged with pensions.
Steve Webb, a partner at the consultancy LCP and a former pensions minister and Liberal Democrat MP, said: “It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back.
“Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today.
“With a chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda, and likely to be considered as a potential revenue-raising measure.”
Last autumn, Webb predicted that chancellor Rachel Reeves might subject employers’ pension contributions to a national insurance charge. The Autumn Budget did not include such a reform, but did include the increases to employers’ national insurance costs that were introduced last month.
Jonathan Watts-Lay, founding director of Wealth at Work, described the potential salary sacrifice scenarios published yesterday as a “stealth tax”.
He said: “It would be bad for everyone. Whether they just do national insurance or national insurance and income tax, the fundamental of all those scenarios is that people have less money going into their pension unless they up their contributions.
“You’re basically saying to someone you either need to pay more money, or you carry on and your pot will be smaller when you get to retirement. There’s no positive impact of it. They either take the pain or they take the pain when they get to retirement.”
A spokesman for HM Treasury said: “These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system. We are committed to keeping taxes for working people as low as possible.”
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