Rumours are rife of a change to tax relief under the Government’s review of pension taxation, with a flat rate looking like a possible outcome. A change would prove unpopular with employers according to a survey by Hargreaves Lansdown. By Nathan Long – Head of Corporate Pension Research at Hargreaves Lansdown.

Only 30% of employers are in favour of changing the tax relief available on pensions. Of these employers, 53% favoured a flat rate of tax relief, with 41% wanting that flat rate at a higher level than the basic rate of tax relief.79% of employers that offer salary sacrifice are concerned it will be withdrawn. 41% have given thought to alternative reward strategies for higher earners. Figures based on a survey of Employers by Hargreaves Lansdown in December 2015 and January 2016 – 345 responses.

Nathan Long – Head of Corporate Pension Research at Hargreaves Lansdown:

‘Rumour of a move to flat rate tax relief on pension contributions will be unwelcome with employers who are not keen on further upheaval. A flat rate could abolish pension salary sacrifice as we know it, as well as potentially introducing further tax on employer contributions. With any change potentially not being implemented until April 2017, to accommodate system changes, the government would probably have to introduce some immediate measure to stop higher earners from exploiting this last gasp opportunity. This could cause issues for any employers with bonuses payable in March should members wish to sacrifice them into the company pension. A flat rate of tax could still see a further fall in the annual allowance, potentially leaving employers with yet more work to do on finding alternative ways of rewarding their highest earners.’

What about Salary Sacrifice?

Salary sacrifice involves employees foregoing remuneration in exchange for an employer contribution into their pension. This might have to be addressed under the new flat rate system, for example higher earners might have to be taxed on the benefit of any employer contributions (though this could be applied only to contributions in excess of the auto enrolment minima). It could be possible for the employer to pay the tax charge on behalf of the employee. So for example, if a 40% taxpayer received a pension contribution from their employer of £100, under a flat rate system of say 33% relief, there’d be a £7 tax charge (the difference between the 33% top up rate and the 40% income tax rate); alternatively the employer could pay the charge for the employee, in which case it would have to grossed up by the tax charge, resulting in an additional charge of £11.66 on the employer. 

More change for high earners

Under a flat rate tax relief we think a reduction to the Annual Allowance is also highly likely, possibly even down to £25,000. A lower Annual Allowance potentially negates the need to taper the allowance for higher earners, but would mean a greater proportion of workers will breach this allowance. This will be a cause of further consternation for employers as they aim to keep the remuneration packages for their highest paid staff attractive.