Synopsis: The recent suggestion from a Conservative MP that salary sacrifice foe pension contributions should be capped at £10,000 a year was a reminder both of the benefits of such exercises and of the risk that the Treasury will take action against them.

Go back to 2001/02 and the basic rate of tax was 22% while employees’ contracted in NICs were 10% (up to an upper earnings limit of £29,900 a year) and the corresponding employer’s rate was 11.9% (with no limit). Wind forward six years to 2007/08 and the NIC rates had risen to 11% and 12.8%, with the cap removed for employees, albeit earnings above the upper earnings limit were only subject to 1% NICs. By 2011/12, the NIC rates had all risen by another 1% (to 12%, 13.8% and 2% respectively), but basic rate tax was down to 20%.

Blame the politicians for:

· Needing to raise more revenue, but being too scared to increase the headline basic rate of tax; and

· Using an increase in NICs as an alternative because National Insurance in incomprehensible to most taxpayers.

The law of unintended consequences means this sleight of hand approach has encouraged widespread use of salary sacrifice arrangements for pension contributions and other cafeteria remuneration exercises. The NIC savings can be worth an uplift of nearly 34% for a basic rate taxpayer (and close to 18% for higher rate taxpayers) when compared with making a personal net pension contribution from net (of tax and NIC) pay.

The rules surrounding salary sacrifice have been unchanged for some years. The HMRC stance is detailed in the Employment Income Manual at EIM42750. Our Library Document covers the principles in details. However, note that from April 2016, the arrival of the single tier pension will remove the potential loss of S2P that is mentioned in the document as a downside of salary sacrifice.

The value of the exemption from NIC for employer’s pension contribution was highlighted in our earlier Bulletin on tax relief; in 2013/14 it was worth £14.0bn. How much of that figure is the result of salary sacrifice is not stated and, in practice, would be difficult to determine. Nevertheless, the government has shown concern about the cost of salary sacrifice schemes generally (not just for pensions) and in the Summer 2015 Budget Red Book said:

‘Salary sacrifice arrangements can allow some employees and employers to reduce the income tax and National Insurance that they pay on remuneration. They are becoming increasingly popular and the cost to the taxpayer is rising. The government will actively monitor the growth of these schemes and their effect on tax receipts.’

Four months later, the main Treasury document accompanying the Autumn Statement 2015 made a similar comment:

‘The government remains concerned about the growth of salary sacrifice arrangements and is considering what action, if any, is necessary. The government will gather further evidence, including from employers, on salary sacrifice arrangements to inform its approach.’

A Conservative MP (and Chartered Accountant), Craig Mackinlay, recently suggested on the Conservative Home website that salary sacrifice should be capped at £10,000 for pension contributions. Whether this was kite flying on behalf of the Chancellor or not is unclear, but it does fit in neatly with evidence that many employers have decided to cap total contributions to DC pension arrangements at £10,000 a year to avoid annual allowance taper issues.

A problem with setting any limit on salary sacrifice is that the concept can be hard to pin down, particularly in the case of private companies: at what point does a corporate decision to increase employer pension contributions and freeze pay become salary sacrifice? The government has legislated to stop salary sacrifice being used to circumvent various tax changes, such as the introduction of the tapered annual allowance, but it has struggled to close all the opportunities (see our earlier Bulletin on the tapered annual allowance).

One possibility is that the government could follow the thinking of Mr Mackinlay, but go one further and say NIC relief only applies for employer pension contributions of up to £10,000, regardless. That would fit in with the £10,000 annual allowance limits elsewhere in pension legislation and would not affect most employees. The method for applying NICs (employer and employee) to the excess could follow the ‘net pay’ principles that already exist for occupational schemes employee contributions.


Salary sacrifice is undoubtedly on the government’s revenue-raising radar, but it may well be that the issue is addressed as part of the pension tax changes rather than in isolation.

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