Why salary sacrifice cuts could just be the start of National Insurance relief restrictions

At the beginning of June, Steve Webb warned that the Conservative government may be considering restrictions on salary sacrifice in a bid to save money.

Speaking at a conference, the former pensions minister said he would be "very surprised" if Treasury "squirrels" were not already working on the subject - saying that changes could reduce the £15bn cost of the salary sacrifice regime. Such changes, he believed, could be made sooner rather than later.

But what is the true cost of salary sacrifice - and from where did the £15bn figure cited by Steve Webb come?

The last time I checked, both HM Treasury and HM Revenue and Customs said that they had no idea what the cost of these arrangements was. That is because there is no requirement for employers or employees to report salary sacrifice arrangements and no information about how benefit packages would change if these sorts of arrangements were not in place.

But the Office for National Statistics does put a number on the national insurance (NI) relief on employer pension contributions - and, in a memorandum item in its PEN 6 pension statistics, calculates such relief was worth about £14bn in the 2013/14 tax year. This figure is made up of several components.

The bulk of this is national insurance relief that both employers and employees receive on pension scheme contributions even if they do not have a formal salary sacrifice arrangement in place.

This is because employers currently get NI relief for the contributions they make. In addition to this, as employer contributions are not treated as part of an individual's gross income, employees do not have to pay NI contributions on this either.

What are the chances?
According to people close to HM Treasury, this figure is made up of about £9.5bn of employer NIC reliefs and £5.5bn of employee NIC reliefs. But the employee relief figure also includes an estimate for salary sacrifice relief.

So if we take the £14bn figure as the total cost of both NI relief on pensions and salary sacrifice schemes, what are the chances the government will make changes to the current regime?

The real question, however, is: what other options does the government realistically have? It has already ruled out a range of tax rises and spending cuts so we should ask if there is anywhere else it can make savings.

Removal or restriction of national insurance tax breaks on employer pension contributions could be a very easy win for a government looking to balance the books - it would be relatively easy to collect and it could be politically pain-free in comparison to some of the alternatives.

Indeed, in last year's Autumn Statement, the chancellor highlighted this as an area of concern - saying HM Treasury would take measures to prevent "payments of benefits in lieu of salary", a statement that caused some uncertainty.

At the time of the announcement, Jelf Employee Benefits head of benefits strategy Steve Herbert said the announcement was "deliberately cloudy" - and he wondered if it was part of a move to deter employers and employees from using the scheme.

Broader reform of NIC rebates would also pave the way for any move to merge income tax and national insurance - something that has been considered by the Conservative government in the past.

However, such a move could have a huge impact on the UK pensions and benefits system - forcing many employers to reconsider pension contribution rates and review the broader benefits they provide staff. Whether this will deter the government from taking action is quite another matter.

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• Topics
• Law and Regulation
• National Insurance
• salary sacrifice