A recent report in the Financial Times discussed the changes to pensions tax relief that could be on the horizon, one of which is the potential for pension salary sacrifice to be abolished by the government. But, unless you’re someone currently either offering or receiving salary sacrifice, it’s quite likely that you’re unaware of both what it is and why it might soon be axed.
The thinking behind salary sacrifice is fairly straightforward. An employee agrees to give up part of their salary and, in exchange, they receive some form of non-cash benefit. This often comes in the form of childcare vouchers or increased pension contributions, hence the reason why it’s regularly referred to as ‘pension salary sacrifice’.
An additional benefit is the tax break salary sacrifice can offer. As the figure an employee is paid becomes lower, they also pay less tax and National Insurance. Your employer will also benefit from not having to pay Employer’s National Insurance contributions on the sacrificed part of the employee’s salary. What the employer does with this saving is up to them, but many will choose to pass at least some of these on to the employee.
If it seems like a win-win situation all round so far, there are potential pitfalls to consider too. Those who choose a salary sacrifice are deemed to be earning less, which can impact upon other factors including mortgage applications and maternity pay. State Pension, Jobseeker’s Allowance and Employment and Support Allowance are also areas that can be affected by earning less.
Life cover received through your employer may also be impacted if your salary decreases – whilst some employers ensure that cover isn’t affected by salary sacrifice, it’s always worth checking before making any decisions. It’s also worth remembering that the financial advantages can only be experienced if the benefits received from salary sacrifice are tax-free. These include childcare vouchers, pension contributions, company cars, work-related training and workplace parking.
Salary sacrifice continues to grow in popularity. However, as more employees take advantage of the scheme, the number of National Insurance payments the government receives from both those people and their employers goes down. As the amount of people entering salary sacrifice schemes goes up, getting rid of salary sacrifice is bound to look more and more like a good way for the government to save some money. At the moment, salary sacrifice is still available, but don’t be surprised if it disappears at some point in the future.