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Will Chancellor have salary sacrifice in his sights tomorrow?

The Chancellor is very likely to tinker with high earners’ pensions in tomorrow’s Budget but could salary sacrifice also be for the chop? Gavin Moffatt, associate of independent pension advisers City Noble considers the issues

It is well-known that The Chancellor is expected to hit pensions for higher earners cutting their annual allowance to £10,000 as a trade-off for a crowd pleasing end of inheritance tax on family homes worth up to £1 million.

Such a move will take higher earners back to double taxation. Any contributions or accrual over the £10,000 will be taxed on the way in and again on the way out. This is more punitive than measures proposed originally by Gordon Brown to limit pension tax relief for higher earners. In 2010 the former Labour Chancellor proposed a mere reduction to 20% tax relief for incoming funds.

Another major perk for working people to boost their pensions, used by many middle and higher earners, is salary sacrifice. While salary sacrifice is always touted as a potential target in any Budget, this time the Chancellor might actually

stretch his general anti-avoidance agenda to salary sacrifice, even though HMRC’s own instructions to its inspectors have been not to treat sacrifice as avoidance.

The courts recognise that we are all entitled to arrange our affairs in the most tax-efficient manner under the law. Therefore any attack on salary sacrifice would seem to mean having to bring employer pension contributions directly into the liability for NICs.

This would be a deeply unpopular and a very contentious move, not least because it would also catch employers who had never operated a sacrifice scheme.

But another way might be possible, and that’s to try and attack the actual act of salary sacrifice. The difficulty is in being sufficiently precise in the definition. However, there is precedent for this. For example, abuse of the exemptions for staff canteens was curbed four years ago by disapplying the exemption if the benefit was linked to a salary sacrifice or flexible benefits arrangement.

Attacking the act of sacrifice itself would mean setting down a definition in law and treating amounts sacrificed as earned income. Needless to say it would be hideously complicated.

The big questions are whether the Government does actually view this as an abuse to be curbed, and if so whether it is willing to meddle in the private contractual relationship between employer and employee.

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