Recent surveys by HM Revenue & Customs (HMRC) indicate that widely used employee benefits such as salary sacrifice pension schemes and Benefit in Kind (BIK) arrangements may be targeted for tax changes in the chancellor’s Autumn Budget, analysis suggests.
The warning, by accountancy and advisory firm BDO, comes after the publication of two employer-focused surveys this week, sparking speculation that these perks could soon face restrictions.
Caroline Harwood, head of employment tax at BDO, commented on the potential implications of the surveys, saying that the chancellor’s potential interest in reviewing the tax reliefs for pensions salary sacrifice schemes is understandable – but that any cuts are likely going to be unpopular.
The HMRC surveys
The first survey, Understanding the attitudes and behaviours of employers towards salary sacrifice for pensions, explored employers’ reactions to hypothetical changes in salary sacrifice schemes. Under current arrangements, employees exchange part of their salary for enhanced pension contributions made by the employer, a setup that reduces both income tax and National Insurance contributions (NICs) for employers and employees.
HMRC’s scenarios tested the impact of removing these tax exemptions. Scenario one removed NIC exemptions, resulting in both employers and employees paying NICs on the sacrificed salary. Scenario two removed both NIC and income tax exemptions, while scenario three suggested removing NIC relief on salary sacrificed over £2,000 per year. Employers expressed concerns that all scenarios could harm employee morale, though scenario three was viewed as more manageable due to its limited scope.
The second survey, titled Research with employers on Benefits in Kind and expenses, focused on the prevalence of BIK offerings among businesses. It found that BIKs are more common in medium and large employers, with popular benefits including workplace parking (39 percent), company cars (29 percent) and cycle-to-work schemes (23 percent). Around 26 percent of these employers said they offered BIKs through salary sacrifice arrangements.
Tax reliefs under review?
Caroline Harwood commented, “The most recent figures show that the cost of NIC tax reliefs from contributions to, and benefits from, registered pension schemes reached £23.5bn in 2023/24. Meanwhile the cost of Income Tax relief for registered pension schemes reached £28.5bn in the same period,” she said.
Harwood pointed out that although previous chancellors have avoided reforming these schemes due to public opposition and the aim of encouraging retirement savings, the high cost of tax reliefs might make them a target.
She suggested that a modest cap on NIC exemptions for salary sacrifice, perhaps in the range of £2,000 to £5,000 of total salary sacrificed for all benefit types, could be introduced.
“Such a change would still be unpopular and reduce incentives for employers to offer salary sacrifice schemes and for employees to make suitable provision for their retirement. It would also add new burdens on employers who would have to calculate the excess if people went over the threshold.”
Harwood added that employees currently benefitting from BIK incentives through salary sacrifice schemes could be significantly affected if the tax incentives are reduced. This could be a blow to those leasing electric vehicles under schemes promoted in support of the government’s Net Zero goals, and impact employer-led environmental initiatives.
