Will salary sacrifice be the Chancellor’s next target?

08 September 2021

Following this week’s announcement that the Government is to hike National Insurance and raise tax on dividends, Gary Smith, Chartered Financial Planner at Tilney, the wealth management firm, warns that salary sacrifice could be the next target in the Chancellor’s sights:

“There can be no doubt that the social care crisis had to be addressed, as it is one of the areas of financial planning that worries people the most, especially as they are concerned that the wealth they have built up during their lifetimes will be eroded, with little to no legacy left to their family. Given that the UK has an ageing population, this crisis is only likely to get worse in the future, and something had to be done. Whether yesterday’s announcement, of a 1.25% rise in National Insurance and Dividend taxes, will be sufficient to solve this problem remains to be seen, and future tax rises surely can’t be ruled out.

“The breaking of their manifesto pledge not to raise taxes has now been broken, and the fear must now be that further tax rises could follow. Rumours of changes to Capital Gains Tax, Inheritance Tax and pension legislation have already been circulating for a number of months now. However, following yesterday’s announcement, I fear that one logical conclusion of the rise in National Insurance will be subsequent changes to hinder ‘salary sacrifice’.

“A salary sacrifice arrangement is one where an employee gives up part of their income, in exchange for a benefit provided by their employer, with the main benefits being that the employee saves both Income tax and National Insurance, and the employer National Insurance, on the portion of the salary sacrificed. The key point being that both employee and employer benefit from National Insurance savings as a result. Salary sacrifice can be done for a number of reasons including pension contributions, car leasing schemes, cycle-to-work loans and loans for annual rail season tickets. These types of arrangements are very popular and with the shift to electric cars, the popularity of car leasing schemes is likely to increase rapidly in the coming years as we approach 2030, and the ban on the sale of new petrol and diesel cars.

“If, following the announcement of the rise in National Insurance tax rates, we see a significant increase usage of salary sacrifice arrangements – which would be entirely logical - this could impact on the projected additional tax receipts the Treasury has forecast from its planned hikes. The Chancellor might therefore be forced to announce changes to legislation to prevent this from happening or, be forced to raise taxes in other areas to offset this loss of revenue. With rail fares continuing to rise, any changes to salary sacrifice arrangements would likely to prove very unpopular with commuters making use of travel loans, especially coming so quickly after a broken manifesto pledge.”

About Tilney Smith & Williamson

Tilney Smith & Williamson is the UK’s leading integrated wealth management and professional services group, created by the merger of Tilney and Smith & Williamson on 1 September 2020. With £54.8 billion of assets under management (as at 30 June 2021), it ranks as the third largest UK wealth manager measured by revenues and the eighth largest professional services firm ranked by fee income. The Group currently operates through three principal brands: Tilney, Smith & Williamson and online investment service Bestinvest. It has a network of 28 offices across the UK, as well as the Republic of Ireland and the Channel Islands. Through its operating companies, the Group offers an extensive range of financial and professional services to individuals, family trusts, professional intermediaries, charities and businesses. It is uniquely well-placed to support clients with both their personal financial affairs and their business interests. Tilney Smith & Williamson’s personal wealth management services include financial planning, investment management and advice, online execution-only investing and personal tax advice. For businesses, its wide range of services includes assurance and accounting, business tax advice, employee benefits, forensic advice, fund administration, recovery and restructuring and transaction services.