Fears are mounting of a stealth raid on pensions after HMRC admitted it is exploring ways to cut back generous tax breaks on workplace savings schemes.
The tax authority has launched research into salary sacrifice arrangements – a system widely used by millions of workers to boost their retirement pots – and asked employers for their reaction to three possible changes.
Under salary sacrifice, staff give up part of their pay to make pension contributions. Crucially, neither they nor their employer pay income tax or national insurance on that portion – making it one of the most popular and tax-efficient ways to save for retirement.
The potential changes tested by HMRC include:
- Scrapping National Insurance (NI) exemptions for both employers and employees;
- Scrapping NI exemptions and also the income tax relief for employees;
- Removing NI exemptions but only on contributions above £2,000 a year.
The research set out examples of the impact. Someone on £35,000 a year, contributing 5% to their pension with employer matching, would pay £210 more a year in NI if exemptions were scrapped, while their employer would be hit for another £242.
Under the harsher option – ending both NI and income tax relief – the worker would lose £560 a year, and the employer an extra £241.
Even the softer proposal, scrapping NI relief only on contributions above £2,000, would leave a £45,000 earner worse off by £30 a year, while their employer would pay £34 more.
Former pensions minister Steve Webb warned that the exercise shows cutbacks are being seriously weighed up.
« It is very revealing that HMRC has paid for research into the likely response from employers if salary sacrifice for pensions were to be scaled back, » said Mr Webb, now a partner at LCP.
« 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. »
The Treasury last night tried to play down the concerns, insisting there are no firm plans to raid pension perks.
A spokesperson said: « These claims are totally speculative. HMRC regularly commissions independent research on all aspects of the tax system.
« We are committed to keeping taxes for working people as low as possible which is why, at last autumn’s budget, we protected working people’s payslips and kept our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT. »
