The government’s much-anticipated plan to increase employers’ national insurance contributions may lead to a crackdown of salary sacrifice schemes, as the chancellor wants to protect the additional revenue that could be generated.
Rachel Reeves will likely increase employer NICs up to two percentages, potentially from 13.8% to 15%8%. She may also lower the PS9100 threshold below which employers begin paying tax.
Pensions and benefits specialists fear that the Treasury will want to regulate salary sacrifice schemes, as they are becoming more popular with employers.
Gary Smith, a partner in financial planning at Evelyn Partners and a retirement specialist, said that an increase in employer NI would make salary sacrifice pension plans more attractive for employers, which could lead to more employees benefiting from them.
“On the other hand, this raises the risk that the Budget will also include a crackdown of salary sacrifice.”
Salary sacrifice refers to a formal agreement between an employer, and employee in which the employee agrees to give up a portion of their salary for non-cash benefits.
Benefits are not subjected to income tax and NICs, so the taxable salary of employees is reduced. Salary sacrifice pensions allow employers and employees to contribute to a workplace pension in a tax efficient way.
Smith stated that the NIC increase could have a major impact on employers’ hiring plans and remuneration.
Evelyn Partners calculates that an employer with 100 workers and a wage bill of PS5,000,000 would have a current employer NIC liability around PS564,000. A rise of approximately 1.25 percentage points will increase this amount to around PS615,500. This represents a 9.1% increase in employer NIC costs.
Salary sacrifice pensions
Smith believes that employers will also be reviewing their benefits and may want to offset this cost by using a salary-sacrifice pension scheme, if it is not already in place.
She could be aggressive and neutralise existing salary-sacrifice arrangements. This would result in a large tax increase” – Gary Smith Evelyn Partners
Smith said that despite the benefits for both employer and employee of salary sacrifice arrangements, many organizations still don’t use them. If the chancellor raises employer NICs then these employers may look at salary sacrifice pension schemes in order to reduce costs.
Employers would pay national insurance on all salaries above the lower threshold if the employer’s rate was increased to 15.8%. If the wage bill is PS1 million over the lower threshold, the employer’s NI bill will increase from PS138,000 up to PS158,000.
Smith said that a typical workplace pension plan would require employees to pay 5% of their salary towards the pension. In this case, the amount would be PS50k. If the employer changed the scheme to a salary sacrifice, the wage bill would be reduced to PS950,000, and the NI to PS150100 (assuming a 15% rate). This would result in a savings of PS7900 for the employer.
The corollary to all of this is that, by limiting salary sacrifices, the chancellor can protect Treasury revenues from an increase in NIC. She could introduce new legislation to stop new salary sacrifice arrangements or include them as part of the employers’ NI assessment, which has been done in the past. She could be aggressive and neutralise existing salary sacrifices. This would result in a large tax increase.
Electric Vehicles
A change in this area could also affect other salary sacrifice schemes, including those for cars. Salary sacrifices are commonly used by employees to lease Electric Vehicles.
There is no limit to how much an employee can sacrifice from their salary, except for avoiding a drop below the minimum wage. Alphabet, a car leasing company that leases more than 700,000. vehicles, said any changes to benefit thresholds would cause havoc for providers.
Caroline Sandall-Mansergh is a consultant and channel manager at Alphabet. She called last week on the government “carefully to consider” any changes in salary sacrifices to prevent the industry from entering an EV slump.
She said that the benefits of salary sacrifice programs for helping people lease a zero-emission vehicle or a lower emission vehicle cannot be understated.
“If employees commute to and from their workplace or do business miles, this will have a positive effect on the carbon emissions reporting of a company, which will be required by most companies from next year.”
She said: “If your company has a program that actively encourages employees to drive vehicles with zero or low carbon emissions, this is a huge benefit for the business, especially if you are actively working towards net zero targets.
Salary sacrifices are a key component to make this possible. Any changes that reduce the appeal of schemes will have negative repercussions and may even conflict with government targets.
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