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Changes to salary sacrifice rules could emerge in UK summer Budget, warns ex-minister

Out-Law News | 15 Jun 2015 | 10:12 am | 2 min. read

The UK government may change the rules around salary sacrifice arrangements as part of the summer Budget, Steve Webb, the former pensions minister, has warned.

Speaking at an industry event, Webb said that he would be "very surprised" if the Treasury was not already looking at ways to amend the rules, which allow employees to opt into some form of non-cash benefit in exchange for lower take-home pay. Salary sacrifice schemes, including pension contributions and childcare vouchers, cost the Treasury around £15 billion a year, Webb said.

"If you are a chancellor who apparently today is going to announce that governments cannot borrow and you still need bucket loads of cash, one thing you might do is say salary sacrifice costs £15bn and make some changes," said Webb, in comments reported by Professional Pensions. "You can imagine if the squirrels at the Treasury are not already working on that subject I would be very surprised."

The new Conservative government intends to pass a law preventing any increase in income tax, VAT or National Insurance rates for the next five years, as set out in the Queen's Speech at the state opening of parliament at the end of last month. Chancellor of the exchequer George Osborne will deliver the first Budget of the new government on 8 July.

However, employment law expert Stuart Neilson of Pinsent Masons, the law firm behind Out-Law.com, said that changes to the existing rules would require some "very interesting drafting" to be given any force.

"A benefit plus a reduced salary is just a contractual arrangement, so it is difficult to see how this could be 'banned'," he said.

A salary sacrifice arrangement allows an employer and employee to mutually agree changes to the terms of the employee's employment contract reducing that employee's entitlement to cash pay in return for a non-cash benefit. This can be financially beneficial for both employers and employees as certain non-cash benefits are wholly or partially exempt from income tax and employer and employee National Insurance Contributions (NICs).

Ahead of new pension tax rules coming into force in April of this year, some warned that employees aged over 55 could use salary sacrifice to redirect a substantial proportion of their salaries directly into their defined contribution (DC) workplace pension, with the associated reduction in employment tax liabilities. Since April, these employees have had more freedom to withdraw pension savings in any way that they wish once they turn 55. The UK government introduced a £10,000 money purchase annual allowance in order to discourage the use of what journalist John Greenwood referred to as a "loophole" in the law.

Pensions expert Simon Tyler of Pinsent Masons said that salary sacrifice arrangements, entered into in accordance with guidance published by HM Revenue and Customs (HMRC), had been "very popular" with some employers.

"Employers will need a re-think of their benefit packages if HMRC finds a way to put to stop to the tax advantages that have been enjoyed," he said.