Treasury – no further plans to limit £3k per employee tax leakage

The Treasury says it has no plans to introduce anti-avoidance measures to plug the £3,000 per employee hole left by the new reduced annual allowance.

Instead it will rely on the penalty of a reduced lifetime allowance of £10,000 for anyone who accesses more than 25 per cent of their fund to deter individuals from sacrificing salary into pension and keep a watching brief on employer and employee behaviour.

Corporate Adviser calculates that the current structure still leaves an estimated £10bn of revenue at risk of individuals sacrificing salary for pension.

The Revenue will lose £3,080 for each basic rate taxpayers age 55 who sacrifices £10,000 a year of salary into pension, comprising lost revenue of £500 tax-free cash, £1,200 employee NI and £1,280 employer NI. The loss to the public purse of each 40 per cent taxpayer who sacrifices £10,000 into pension would be £3,580. On the basis that there are around 5m workers over the age of 55, and taking into account existing pension contributions, the loss to the Treasury if everyone took advantage of the tax efficiency could exceed £10bn, according to Corporate Adviser estimates. If just 10 per cent of workers sacrificed £10,000 of salary into pension, losses of £1bn could be sustained.

The Treasury consultation response states that the £10,000 reduced annual allowance would not affect 98 per cent of pension savers, raising questions as to whether it poses any realistic disincentive to some employers and employees adopting this strategy. This would also suggest the current arrangement creates no effective disincentive for the majority of the working population to sacrifice more than £10,000 in the first year.

Some industry experts had expected anti-avoidance rules to be introduced to stop tax leakage.

A Treasury spokeswoman says: “At the moment we have no plans to introduce any measures to discourage tax avoidance other than the reduced annual allowance.”

Aviva head of policy, pensions and benefits John Lawson says: “Most big employers offer salary sacrifice and, in the financial services sector in particular, bonus sacrifice. You could see this becoming more attractive to those over 55. We believe some sort of anti-avoidance measure is needed to stop this happening.”