Salary sacrifice: Is flex under threat?

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As George Osborne once again strives for relatively palatable ways to keep the budget deficit within acceptable bounds, pundits are pondering whether salary sacrifice arrangements might find themselves under renewed attack, says PKF partner Philip Fisher.

This could have a number of consequences including threatening the existence and future of flexible benefits schemes, many of which rely on employees taking a reduction in pay as part of the conditions for entry.

A few years ago “flex”, as it became affectionately known, seemed to be a dream panacea. The original principle was simple. Employees would get a normal pay package without any benefits in kind attached.

They would also get an allowance, expressed in monetary terms, points or some other fashion, which they could expend on the benefits that they wanted from a menu of available choices.

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01st Mar 2012 17:12

Pension contributions and tax relief

As far as I'm aware the payment of pension contributions via salary sacrifice offers no saving in tax since pension contributions attract tax relief (within the prescribed limits) whether paid out from salary with basic rate relief at source (net pay scheme) or paid out from salary via a salary sacrifice. With the former, you enter the contribuitions in the SA tax return and so claim any additional tax relief due beyond the basic rate relief at source; with the latter, no entry is made in the SA tax return since you have not made the contributions - your employer makes them using the sacrifiec salary.  I don't see how under the halfway house 'restricting tax relief where contributions are funded through sacrifice arrangements' can be achieved or be relevant as there's nothing to restrict. There is, of course, an NICs saving and as we all think NICs is a tax, maybe there is a tax saving :)

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05th Mar 2012 11:19

We're being softened up, though

There was a statement from HMRC last week that summarised the level of tax relief relating to pensions as £32.9bn pa.  About £6.6bn on employee contributions, £19.4bn on employer contributions, and about £6.8bn on fund investment income and gains.  The NIC relief for employer contributions runs to about £13bn as well.

Alistair Darling once said, when justifying the new annual allowance charge, that it was plainly unfair that the top 1% of earners took 25% of all the tax relief for pensions.  He'd presumably forgotten that those people pay over 25% of all the income tax (now almost 28%).  Why would HMRC issue a release highlighting how much tax relief is given for pensions when the Treasury is in purdah before the Budget?  It's a great prompt for us to speculate!

It will be interesting to see how, if at all, they propose to tax and/or NIC employer contributions.  Employee contributions could all move to the personal pension basis, paid out of net pay, but HMRC, employers and pension funds will need a year's notice to change their IT systems.  

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