Budget 2016: Why the salary sacrifice shouldn’t be sacrificed

With the Chancellor largely keeping his cards close to his chest, there has been less speculation than usual as to what exactly the little red suitcase has in store for us this week.

This is even more the case given the U-turn made by George Osborne over introducing a flat rate on pensions tax relief, which would have capped the relief an individual would have not paid on their pension contributions at between 25-33%.

But with the Government still needing to balance the books, there has been some speculation that Osborne may instead limit the generosity of salary sacrifice, a scheme where employees give up their right to part of their contractually owed salary or bonus in exchange for a non-cash benefit. Salary sacrifice has proved very popular for both employees and employers, as neither has to pay any national insurance contributions (NICs) on the money that is ‘sacrificed’ while the employee will also pay less tax.

For example, if you are being paid £1,000 a month¹ and decided to accept £100 of Childcare Vouchers via salary sacrifice, you would only pay £180 in tax rather than £200, and you would only pay £108 in National Insurance rather than £120 (saving you £32). Your employer, meanwhile, would only pay £124.20 in National Insurance based on your reduced annual pay, saving them £13.80. For a small business therefore, having for example ten employees taking advantage of the salary sacrifice scheme can make a huge difference annually to what they may save in NICs.

Salary sacrifice is an extremely useful Government-incentivised scheme that can also be used to mitigate tax and national insurance costs when making additional pension contributions or through the Cycle to Work scheme. However, it is estimated that it costs the Government around £5 billion a year², so it is obvious why they may wish to reduce or even cull the initiative altogether.

In recent years, tax avoidance has been heavily clamped down on, although fortunately this has largely targeted people who are deliberately trying to avoid tax payments through complex planning arrangements, often involving holding an offshore account, or large multi-national corporations who are not fairly paying their way. We can but hope that this continues to be the main focus and would be very disappointed if Government was to treat employers and employees making legitimate use of salary sacrifice in the same way as those making use of more egregious tax mitigation vehicles.  Used appropriately, salary sacrifice aids companies with their financial planning and encourages people to think about their long-term future savings.

Brian Palmer , former tax policy adviser for AAT..