Feature – Focus on pensions: Salary sacrifice threat defused

Sonia Speedy finds it unlikely that the government plans to mount a full-frontal assault on limiting pension schemes offered through salary sacrifice arrangements

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Fears have arisen that HM Revenue & Customs (HMRC) may be gearing up for a crackdown on smart or salary sacrifice pension schemes to claw back lost National Insurance (NI) contributions. So how concerned should employers be and what, if anything, should they do to prepare?

Salary sacrifice or smart pensions work on the basis that employees give up their right to a certain amount of their gross wages in return for this sum going directly into their pension. Neither the employer or employee pay NI contributions on the amount involved.

Concerns about whether salary sacrifice on pensions could be up for the chop arose following the publication of draft pensions tax simplification guidance notes relating to deductions for registered pension schemes. However, that guidance has recently been revised, cooling fears.

John Davies, head of business law at the Association of Chartered Certified Accountants, had serious concerns for smart pensions on the basis of the initial draft guidance, but his fears have now been largely allayed.

He believes the guidance, particularly EIM42760 in the Employment Income Manual, categorically states that salary sacrifice schemes will be allowed for tax purposes if certain conditions are met.

This essentially means that a scheme needs to ensure that the employment contract is definitively changed so as to restrict the employee’s right to receive the sacrificed remuneration.

Deductions are typically and historically allowed for contributions made “wholly and exclusively” for the purposes of the employer’s trade.

“HMRC has provided a much-needed certainty for employers and employees on what had become a source of concern for many of them. HMRC’s clear support for salary sacrifice has avoided what could have been damaging accusations that government is deterring people away from saving for retirement,” says Davies.

But Kevin Wesbroom, principal consultant at Hewitt Associates, has been relatively unconcerned about fears that there would be a crack down on smart pensions. He believes it is business as usual for the hundreds of major schemes that exist, particularly after no mention was made of them in the Budget on 22 March.

Closing such a loophole properly would involve “draconian” measures such as taxing all pension contributions, which would prove extremely unpopular, he says.

An HMRC spokesman says that if an expense is clearly a business cost, there should be no concerns about the permissibility of the deduction.

“It will only be those cases on the margins that will give rise to concern that a deduction may be challenged,” he explains. The spokesman adds that any potential challenges taken up by tax inspectors will first have to be cleared by the Audit and Pension Schemes Services office.

Tom McPhail, head of pensions research at Hargreaves Lansdown, warns that employers can never be certain employer contributions will qualify for corporation tax relief as local tax inspectors have the freedom to deem whether or not a company’s pension contributions are wholly legitimate.

But provided it can be shown that the contribution is proportionate to an individual’s employment status and earnings, it is unlikely to cause difficulties.

If you read nothing else, read this …

  • Fears that HM Revenue & Customs (HMRC) planned to crackdown on salary sacrifice pension schemes in the name of tax avoidance have been allayed.
  • Plans should be reviewed to ensure they meet HMRC conditions.
  • Pension contributions should be kept proportionate to an employee’s status and earnings.