The Office for Budget Responsibility (OBR) is located at 102 Petty France, in the same building as the Ministry of Justice.
Some 80% of members impacted by the government’s cap on pensions salary sacrifice will respond by cutting contributions, latest analysis by the Office for Budget Responsibility (OBR) reveals.
In her November Budget last year, chancellor Rachel Reeves announced the government would limit the amount of someone's salary that can be sacrificed through pension contributions without incurring national insurance (NI) payments to £2,000.
In a policy paper published in December, HM Revenue & Customs (HMRC) said 56% of the 7.7 million employees currently using salary sacrifice – some 4.3 million individuals – would be "fully protected" by the £2,000 thresholds, leaving 3.3 million others impacted by the cap.
However, documents released by the OBR yesterday (6 February) suggested many more could also be affected depending on how businesses and individuals responded to the new cap.
The OBR analysis said: "The behavioural response to the measure is highly uncertain, given the various channels through which employers and employees can respond."
The OBR said responses to the measures could include a reduction in contributions by individuals in defined contribution (DC) schemes.
It said the assumption is that as many as 80% of individuals in scope in DC schemes would respond by reducing contributions – with higher earners reducing their individual contributions by 1.8% and lower-earning employees reducing their contributions by 2.75%.
The OBR said this would increase the yield of the exchequer's salary sacrifice measure by an estimated £100m each year, as increased take-home pay is charged income tax as well as NICs.
‘Formalising' salary sacrifice
The OBR said behavioural responses could also include employers switching to ordinary contributions – "formalising salary sacrifice by increasing employer contributions in place of wage growth or lowering contractual salary in exchange for higher employer contributions. Employer contributions to pension schemes remain NI exempt.
The OBR estimated this behaviour would reduce the yield of the policy by £0.7bn in 2030-31, as a result of reducing the share of the tax base that will pay NICs.
Shift to RAS
In addition to this, the OBR said a number of employees would switch to relief at source (RAS) schemes as a result of the salary sacrifice cap – a move that would see them having to reclaim higher and additional rate income tax on their pension contributions via their self-assessment return.
It said this shift would create a temporary timing effect, as employees pay increased tax in one year and reclaim it in the next, but also a permanent increase in receipts as it estimated around 10% of higher-rate and additional-rate relief from RAS schemes would be unclaimed.
Forestalling
And the OBR said there could also be some forestalling – with individuals increasing contributions in the period before the policy commences but said this was "not expected to be a widespread response as individuals are likely to be already contributing as much as they can afford or can do tax efficiently under their annual allowance".
Costing of charging NICs on salary-sacrificed pension contributions
Source: HMRC and OBR
