Budget – Uncertain future for salary sacrifice as merger of income tax and NI unveiled

The planned merger of income tax and National Insurance contributions will create more upheaval than A-Day, and could lead to the end of salary sacrifice, experts have warned.

But the long timescale envisaged for the introduction of the change means existing salary sacrifice implementations need not be put on hold.
Chancellor George Osborne announced in the Budget a plan to merge income tax and NI, although he said NI would not be extended to pensioners or other forms of income, and added that the contributory principle would be retained.
The Government will issue a consultation on the matter, and says the huge complexity of the change means it will be years before it is fully implemented.
Bluefin says the merger of income tax and NI will affect a wide range of the benefits that corporate intermediaries advise upon, including critical illness cover, company cars, cash plans and pensions.
Osborne said: “For decades, we have operated Income Tax and National Insurance as two fundamentally different taxes and forced businesses large and small to operate two completely different systems of administration, with two different periods and bases of charge. The resulting anomalies are legion.
“And it imposes totally unnecessary costs and complexity on employers, and costs the taxpayer in the extra burden it places on HM Revenue & Customs.
“This huge task will therefore require a great deal of consultation and take a number of years to complete. But it is time we took this historic step to simplify dramatically our tax system and make it fit for the modern age.”
Robin Hames, head of technical at Bluefin says: “The effects of a merger of income tax and national insurance will create a bigger upheaval than the A-Day simplification changes.  All the contribution-based state benefits would have to be radically amended, and while that might be a laudable aim there are serious obstacles to overcome.
“For more than a decade it seems like the merger of PAYE and NI has been the holy grail of simplification but two of the major obstacles have been the contribution-based nature of a range of state benefits, and the fact that there are a number of employee benefits that do not have the same tax and NI treatment.
“A combined tax and NI rate would create winners and losers if it’s applied across the board.  Any new tax treatment of employee benefits will drive changes that employers make to their pay and benefit packages.  Benefits with different treatment include critical illness, company cars, hospital cash plans, and of course pensions.”
David Robbins, senior consultant at Towers Watson says: “At present there is still a lot of uncertainty as to what they will put in its place, so the future of salary sacrifice is unclear. But the timescale they are talking about means there is no reason to stop current implementations.”  
Robert Reid, director of Syndaxi Financial Planning says: “This could create problems in future as many flex schemes have been set up on the basis that the NI savings will pay for them.”