[UK] Higher earners and private sector workers will bear brunt of salary sacrifice changes

In the UK, analysis from the Institute for Fiscal Studies (IFS) has found that higher earners and private sector workers will bear the brunt of the government’s planned tax changes to salary sacrifice pension contributions, Pensions Age reports.

IFS’s research revealed that employees in the top 10 per cent of earnings are far more likely to be affected by reforms, announced in the autumn Budget, which will see salary sacrifice pension contributions above £2,000 become liable for both employer and employee National Insurance contributions from 2029/30.

The changes were passed into law in April, as the National Insurance Contributions Act received Royal Assent alongside the Pension Schemes Act. The Office for Budget Responsibility (OBR) stated that it expects the measure to raise £2.6bn a year by the early 2030s.

The IFS reportedly said that 48 per cent of employees in the highest earnings decile currently make salary sacrifice contributions above £2,000, compared with fewer than 1 per cent of employees in the bottom fifth of earners.

Around 15 per cent of employees, overall, make salary sacrifice contributions above the threshold, it said.

In addition, the report stated that the majority of the additional NIC burden would fall on employers, although this would likely be passed on to employees through lower wages over time.

IFS’s analysis found that the average additional NIC liability for employees in the top earnings decile and their employers would be almost £1,000 a year, with 69 per cent of the total extra NIC liability borne by this group and their employers.

It also found that the reforms would disproportionately affect the private sector, where salary sacrifice arrangements are more widely used.

It revealed that 18 per cent of private-sector employees make salary sacrifice pension contributions of over £2,000 a year, compared with just 7 per cent of public-sector employees.

As a result, the average yearly increase in employer NICs in the private sector was estimated at £151 per employee, more than four times the £37 increase estimated for the public sector.

Matthew Oulton - IFS research economist - said the reforms would raise “significant tax revenue principally from higher-earning private sector employees”.

But he stated that the policy “falls short of a principled reform to the taxation of pensions”.

“It does not tackle the fundamental issue with the NICs treatment of pension contributions: the asymmetry between the taxation of employer and employee contributions,” Mr Oulton said.

He reportedly added that a more ambitious reform would have been to replace the blanket exemption of employer pension contributions from employer NICs with “a new, less generous subsidy” designed to raise similar levels of revenue.

The IFS report additionally warned that the reforms would add further complexity to the pensions tax system, because employers and HMRC would need to monitor whether salary sacrifice contributions exceed the £2,000 threshold.

Source: Pensions Age

(Quotes via original reporting)

In the UK, analysis from the Institute for Fiscal Studies (IFS) has found that higher earners and private sector workers will bear the brunt of the government’s planned tax changes to salary sacrifice pension contributions, Pensions Age reports.

IFS’s research revealed that employees in the top 10 per cent of earnings are far more likely to be affected by reforms, announced in the autumn Budget, which will see salary sacrifice pension contributions above £2,000 become liable for both employer and employee National Insurance contributions from 2029/30.

The changes were passed into law in April, as the National Insurance Contributions Act received Royal Assent alongside the Pension Schemes Act. The Office for Budget Responsibility (OBR) stated that it expects the measure to raise £2.6bn a year by the early 2030s.

The IFS reportedly said that 48 per cent of employees in the highest earnings decile currently make salary sacrifice contributions above £2,000, compared with fewer than 1 per cent of employees in the bottom fifth of earners.

Around 15 per cent of employees, overall, make salary sacrifice contributions above the threshold, it said.

In addition, the report stated that the majority of the additional NIC burden would fall on employers, although this would likely be passed on to employees through lower wages over time.

IFS’s analysis found that the average additional NIC liability for employees in the top earnings decile and their employers would be almost £1,000 a year, with 69 per cent of the total extra NIC liability borne by this group and their employers.

It also found that the reforms would disproportionately affect the private sector, where salary sacrifice arrangements are more widely used.

It revealed that 18 per cent of private-sector employees make salary sacrifice pension contributions of over £2,000 a year, compared with just 7 per cent of public-sector employees.

As a result, the average yearly increase in employer NICs in the private sector was estimated at £151 per employee, more than four times the £37 increase estimated for the public sector.

Matthew Oulton - IFS research economist - said the reforms would raise “significant tax revenue principally from higher-earning private sector employees”.

But he stated that the policy “falls short of a principled reform to the taxation of pensions”.

“It does not tackle the fundamental issue with the NICs treatment of pension contributions: the asymmetry between the taxation of employer and employee contributions,” Mr Oulton said.

He reportedly added that a more ambitious reform would have been to replace the blanket exemption of employer pension contributions from employer NICs with “a new, less generous subsidy” designed to raise similar levels of revenue.

The IFS report additionally warned that the reforms would add further complexity to the pensions tax system, because employers and HMRC would need to monitor whether salary sacrifice contributions exceed the £2,000 threshold.

Source: Pensions Age

(Quotes via original reporting)