Earlier today I highlighted some potential changes to the world of employee benefits following the budget. In particular, I went in to some detail around the proposed merger of Income Tax and National Insurance (NI). Before reading this post, I strongly suggest you take a look at this earlier one https://www.jelfgroup.com/blog/2011/03/the-budget-2-possible-income-tax-and-ni-merger/ so that we are all on the same page.

I quite deliberately chose not to drag Salary Sacrifice into the earlier post, as I just thought it was too much info for non-pension anoraks (which, sadly, I must now be) to absorb. If you are of the anorak persuasion, operate Salary Sacrifice on your pension, or use Salary Sacrifice for and/or to fund flex benefits, this post may well be important to you. So read on…

Again, to get us to the same page, let’s look at why Salary Sacrifice has been so important to employee benefits. Wheras most UK pensions automatically qualify for Income Tax relief, they do not avoid either Employer or Employee National Insurance liability. By operating Salary Sacrifice, the employee effectively forgoes a salary payment, and in doing so avoids Income Tax, personal NI liability, as well as employer’s NI liability. In pure tax-avoidance terms (tax avoidance is legal, tax evasion is not), this is the most effective way of operating and participating in a pension scheme. This is why so many schemes operate on this basis.

The employer’s NI saving has traditionally been used to either further enhance the employees pension saving, provide funding for other benefits (particularly flex platforms) or, in some cases, just to offset against the employer’s running costs.

From the employees point of view, Salary Sacrifice (when explained well and delivered with extra benefits and/or additional contributions) has proved very attractive, and has been a real boost in creating more interest in workplace pension savings, and encouraging employees to save more than they otherwise would have done in their pension scheme.

In my view therefore, Salary Sacrifice has been a success story, helping to bridge some of the savings gap, and supporting employers in offering a wider choice of benefits to employees, which in turn has also reduced the national ‘risk gap’ for employees. For those not familiar with the ‘risk gap’ (which will be many readers), it is essentially the gap between the level of personal insurances an individual may have for risks such as life cover and long-term illness, against the cover ideally needed. This is a real problem in the UK, and something I will cover in a separate post later this year. But to return to my theme, Salary Sacrifice has been a good thing.

The proposed merger of Income Tax and National Insurance has the potential to remove this incentive, as the employer’s NI element may be removed from the equation. This will leave employers who have relied on Salary Sacrifice to fund wider benefits, and flex in particular, facing a decision of either reducing benefits for employees, or finding the extra costs from elsewhere. Even in ‘normal’ times this would prove difficult, but with a global economic downturn, and with Auto-enrolment and the Retail Distribution Review on the horizon, this could prove very problematical.

It’s also worth mentioning that Salary Sacrifice is not limited to just pensions. Several other benefits rely on this route, the most notable being Childcare Vouchers and Cycle to Work schemes, so the implications of this could be far reaching.

So, this could all get very interesting. On the one hand we have the desire to simplify the tax code. Against this, we have the possible worsening of the risk and savings gaps. The savings gap is something that the Government are trying to bridge with auto-enrolment and NEST, but such a hammer blow as removing Salary Sacrifice for exiting arrangements would be a really detrimental step and may undo much of the progress being made here. The risk gap will become more visable as the welfare state is constrained, so is likely to become more apparent, not less, over the coming years I suspect.

I suspect much will depend on the responses to the consultation, and effective lobbying, during the consultation period. I would point out that this does not have to come from within the industry, and all readers of this blog can take part (and when I know more, I will let you know how you can do so if you wish).

So, as ever, lots to think about, and I think the question of merging Income Tax and National Insurance may become a very interesting debate. As I said in my last post though, change will be some way off I suspect, so don’t make any decisions based on any of this just now.

Best regards

Steve