THE Chancellor faces losing more than £1 billion a year in tax revenues as companies increasingly adopt what has been dubbed by tax experts as the tax dodge of the decade.

The tax avoidance measure, which is totally legal, appears to leave both employers and employees better off.

British Telecom, Tesco, J Sainsbury, LogicaCMG and Ernst & Young have all started to adopt the technique, aimed at reducing national insurance (NI) bills for both company and staff.

The saving is achieved by rejigging staff pension arrangements so that employees are no longer required to contribute to their pension scheme. The company agrees to take on the commitment itself, but docks the employee’s salary by an equivalent amount

BT, which started applying the method in June, told The Times that it would save £10 million in NI payments each year, while its employees would be saved the same amount.

About 76,000 BT employees, 90 per cent of those eligible, have signed up in the first wave of a two-stage pay restructuring programme. More BT employees are currently signing up for stage two.

“The numbers speak for themselves,” said a BT spokesman. “We have a duty to be as tax-efficient as possible.”

The tax savings can be spectacular in respect of higher-paid employees. LogicaCMG, the computer software group, which is in the process of adopting the scheme, expects the Inland Revenue to lose £518 a year for each of its employees earning about £50,000.

Sainsbury’s launched its tax-avoiding arrangements in March and most of its 50,000 pension fund members are thought to have switched. It is expected to avoid millions of pounds in NI as a result. “This is sensitive information which we wouldn’t want to reveal,” a spokeswoman said. Tesco, which adopted the technique a year ago, also declined to quantify its tax savings.

Other employers are rushing to follow suit, according to employee benefits consultants, who say that the change is usually offered to staff as part of a wider flexible benefits package.

“It’s one of those happy, win-win situations,” said Paul Farrell, of Aon, the benefits consultancy, which has set up a number of such schemes for client employers.

Although a few pioneering employers made the move some years ago, it is only in the past couple of years that the avoidance measure has taken off. There are usually safeguards to ensure employees are no worse off. They still keep an old “reference salary”, on which pay rises, benefits and redundancy terms are based.

The system is not suitable for very low-paid people, who can miss out on state benefits and for workers past the state retirement age.

LogicaCMG expects to save £500,000 on NI contributions on its 6,000-strong UK workforce. Its employees will also make additional tax savings.Britvic, the soft drinks company, expects to save £300,000 in NI after rejigging its pension arrangements: 3,000 employees, 99 per cent of those eligible, signed up.

Extrapolating from the BT and Logica experiences, if all private sector companies made the switch, the saving in NI for them and their employers is estimated at above £1 billion.

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