Smart or salary sacrifice pensions could be under threat according to the terms of new HM Revenue & Customs tax guidance due to be published next month, a leading tax expert has warned.
Smart pensions effectively involve employees’ salaries being reduced by the amount of their pension contributions and those contributions instead being paid directly by the employer, resulting in National Insurance (NI) savings for employers and employees.
But new pensions tax simplification guidance notes relating to specific deductions for registered pension schemes, due to be published on April 6, could effectively ban employers from using salary sacrifice vehicles to avoid paying NI contributions on payments to occupational pension funds, said Alistair Kendrick, a tax partner at accountancy firm Wilder Coe.
The guidance has already been published in draft form for public consultation, which ended last month. The draft includes an outline of circumstances where employer contributions to a registered pension scheme are deductible for the calculation of trading profits for tax purposes. According to these rules, the contribution should be made wholly and exclusively for the purposes of the trade of the employer.
Kendrick said guidance note BIM46025 specifically relates to deductions for registered pension schemes and could threaten salary sacrifice schemes. It states: “Where the salary is less than the commercial rate and the size of the pension contribution appears to have been inflated, you will need to establish why this has been done and whether any tax or NI planning for the employees was one of the purposes for the size of the pension contribution rather than an incidental benefit arising from it.”
HM Revenue and Customs (HMRC) would not comment on that claim, describing Kendrick’s interpretation of the guidance notes as speculation. But a spokesman said that under the separate National Insurance Contributions Bill there was only provision for action to be taken in cases of both tax and NI avoidance.
Philip Paur, director of employer solutions at Deloitte, admitted that the notes were “unhelpful” and could be interpreted as a threat to some smart pensions, but he understood that the HMRC was content with most schemes.