HMRC explores cuts to pension salary sacrifice ahead of potential changes
The government has published research commissioned by HMRC which explores the impact of potential changes to workplace pension salary sacrifice schemes on employers’ attitudes.
The study, which was conducted between 30 May and 3 August 2023, looked at how employers would react to three hypothetical scenarios in which the salary sacrifice NI exemptions would be cut back to increase the NI levied on workplace pension contributions.
The first scenario removed the NI exemption for employers and employees, resulting in employer and employee NI charges on the salary that the employee sacrificed.
The second scenario explored in the research removed the NI exemption for employers and employees, and the income tax exemption for employees on the salary sacrificed.
The third scenario removed the NI exemption above a threshold of £2,000 per year, meaning that those on higher wages could pay an additional amount in NI on their salary sacrifice beyond that threshold.
According to the research, while all three scenarios would be viewed negatively by employers, the third hypothetical change was viewed most favourably. However, employers noted that it would be complex to calculate and would adversely affect employee morale.
While this research was commissioned under the previous Conservative government, its publication comes as the UK is looking for ways to increase its revenue to boost growth and weather economic risks.
Difficult decisions on the horizon
The publication of this research comes as the government faces difficult fiscal decisions in the near future to help facilitate economic recovery.
The IMF’s recent visit to the UK found that while growth is projects at 1.2% in 2025 and 1.4% in 2026, longer-term decisions may need to be made to shore up stability, including possible tax increases.
“In the longer term, difficult fiscal choices will likely be needed to address spending pressures and rebuild fiscal buffers. Under current policies, staff analysis suggests spending to be around 8% of GDP higher by 2050, mainly due to additional outlays on health and pensions from population ageing,” the IMF said.
“Unless revenue is increased, for which there is scope, tough policy decisions on spending priorities and the role of the state in certain areas will be needed to better align the coverage of public services with available resources.”
LCP partner Steve Webb told PensionAge that HRMC’s publication of its salary sacrifice research pointed to a significant risk of cuts to pension salary sacrifice schemes in the upcoming Budget.
“Although the research was commissioned under the previous government, the desire to raise additional revenue is, if anything, even more acute today,” Webb said.
“With a Chancellor reportedly looking to make up a multi-billion pound hole in the public finances in her Autumn Budget, this research suggests that changes to salary sacrifice are firmly on the agenda and likely to be considered as a potential revenue-raising measure.”
