Webb’s sal sac warning prompts 12% contribution hike fears

The Treasury could use the July Budget to abolish salary sacrifice, a move that would save it £15bn a year, former pensions minister has told an audience of HR professionals.

Speaking at a Secondsight conference this morning, Webb said he would be surprised if Treasury officials were not considering cutting salary sacrifice, which would effectively mean levying National Insurance on pension contributions. Such a move would close off most of the £20bn loophole created by the pension freedoms identified by Corporate Adviser, which can be achieved by over-55sflushing salary through pension. Challenged on the issue when he was a minister, Webb said the only way to solve the problem would be by abolishing salary sacrifice.

Abolishing salary sacrifice would involve requiring employers to pay National Insurance on pension contributions of up to 12 per cent. Employees would see their pension contributions subject to NI of up to 13.8 per cent.

Speaking at the event today Webb said: “The only other thing that I think could happen is changes to salary sacrifice.

“If you are a chancellor who apparently today is going to announce that governments cannot borrow and you still need bucket loads of cash – one thing you might do is say salary sacrifice costs £15bn and make some changes.”

Barnett Waddingham consultant Malcolm McLean says: “I can absolutely see Osborne doing this, as requiring NI on pension contributions is small beer compared to everything else he has got on his plate. He needs £8bn for the NHS, he needs to cut the deficit, money for Trident and HS2, and he has said he is not going to increase income tax, VAT or NI.

“They are already reducing the lifetime allowance to £1m and tapering tax relief down from £150,000 and everyone is talking about the fact they may introduce a flat rate tax relief approach. The Budget could be very bad news for pensions.”

GenLife managing director Nick Ayton says: “Salary sacrifice is now widely recognised as a win-win situation for all but the government, which misses out on the National Insurance contributions. Incentivised schemes like these are a key reason why many people are currently saving for their retirement and it would be a dark day indeed if they were to disappear.

“This may just be speculation, but the Government will be tempted by the opportunity to claw back the billions of pounds being lost each year due to salary sacrifice remaining in place. Although it was never officially recognised as a Government policy, the HMRC gave these schemes the green light a few years back, allowing it to naturally evolve into a key employee benefit that alleviated costs for both employers and employees.

“However, the schemes are not universal and so while some may face the disappointment of losing the benefit, many more employees will not be affected. This will allow the Government to make a cut without causing widespread resentment among savers.”