Government urged not to change salary sacrifice arrangements in Budget tax raid

The Society of Pension Professionals (SPP) has written to all 650 Members of Parliament warning of the dangers in reducing or removing salary sacrifice arrangements for pension contributions. 

Research into salary sacrifice, commissioned and published by HMRC earlier this year, has led to some speculation that the government may seek to make savings by abolishing or reforming salary sacrifice for pension contributions. 

In the run-up to the Budget on 26th November such speculation has inevitably increased, with salary sacrifice rumoured to be one area the government could look to as the Chancellor aims to plug an estimated £22bn to £30bn shortfall in the nation's finances. Other pension taxes rumoured to be up for consideration are pension tax relief, the tax-free cash allowance, and the lifetime allowance.

The SPP is now seeking to explain what the implications would be if government were to impose restrictions or abolish salary sacrifice arrangements.

Around a third of private sector employees make use of salary sacrifice arrangements, and almost 10% of public sector workers do so too. So, any changes will bring upheaval to a large number of workers with removal of the arrangement costing millions of employees hundreds of pounds a year. 

The SPP explains that whilst there is a £4bn cost to the government in providing salary sacrifice arrangements (£1.2bn for employees and £2.9bn for employers), there is also “widespread recognition that this is a positive investment that incentivises pension saving”.

The research commissioned and published by HMRC demonstrated that employers are generally very supportive of the arrangement and believe that any changes would cause confusion, reduce benefits to employees, and disincentivise pension savings. The research put forward three potential scenarios for restricting salary sacrifice with employers flagging that in all three scenarios, employee morale was likely to be badly affected. 

Steve Hitchiner, chair of SPP’s Tax Group, said: “Changing salary sacrifice arrangements would lead to a reduction in take home pay for millions of employees who are saving into a workplace pension, with the greatest impact for those earning less than £50,284 a year. 

"It would also represent another sizeable cost to employers, despite the Chancellor’s public commitment against this, and would undermine the critical role that employers play in supporting and promoting good quality pension saving vehicles.”