Government Target ‘Salary Sacrifice’
18 June 2015 by Marketing Team
Many employees could be affected by the July emergency budget this summer, after former pensions minister Steve Webb warned that ‘salary sacrifice’ arrangements would likely be subjected to a government crackdown.
Salary sacrifice is a concept that has been around for over 15 years and is currently viewed as a win-win situation for all but the government; it allows employers to offer their staff cash and non-cash benefits, and have access to their pensions as early as the age of 55 thanks to the new pension freedoms. Typically, the employee will take a cut on their take home pay and ‘sacrifice’ this money into a pension fund free of income tax and national insurance contributions. Depending on the agreement between the employer and employee, earnings can be increased by up to double depending on the tax bracket of an individual.
News of these changes will come as little surprise to some, with Chancellor George Osborne declaring in December 2014 that the government would be implementing measures in order to stop ‘payments of benefits in lieu of salary’. As the Conservatives have promised no increase in income tax, VAT or national insurance, and also pledged £12 billion in welfare cuts, how will they look to recoup this money? Salary sacrifice has been described as a ‘loophole’ in the law, and would be an obvious area for the government to redress as it is currently costing the Treasury around £15 billion a year.
It must also be noted that salary sacrifice schemes, though relatively common, are far from universal. If the government are to make changes then many employers and employees will be unaffected, thus allowing the government to make a cut without facing widespread public opposition.
That being said, many are unsure on what the government could actually do in practice to prevent salary sacrifice schemes. It is very difficult to dissociate between an employment contract that is a genuine salary sacrifice scheme, and one that just happens to have a very generous pension contribution. These are just contractual terms and it is hard to see how the government could legislate against this.
It will, therefore, be interesting to wait and see what happens in July, with Webb stating: “You could say we’ll cap it, limit it, or phase it out. There’s a lot of questions about how you do that, but I can’t believe there aren’t squirrels in the Treasury beavering away”.
If you are seeking Employment law advice as an employer or an employee, we at Fisher Jones Greenwood can help. Just contact our Employment department by phoning 01245 890110 or emailing [email protected].