Osbourne's tax relief changes in the March budget

gadgetmind

Snakey wrote: »

why should somebody who gets £55k plus a non-contributory pension scheme where the employer puts in 10% of gross salary, pay less tax than somebody who gets paid £60.5k and makes salary sacrifice contributions of £5.5k?

And why should the person with £5.5k going into their pension pay more tax and NI than someone getting the same end benefit from a DB scheme?

The suggestion of an employee BIK for employer pension payments might just about work, but they need to use real-world multipliers for DC rather than their cloud cuckoo ones.

As it happens, I get a 10%+ boost to my pension payments as a thanks from the company for saving them 13.8% employer's NI, so I'd really just be losing this and paying another £4kpa in tax, assuming I can avoid exceeding £100k, which is hard even on a 4 day week.

Snakey

Oh, I agree with you - if the general idea is "pension contributions should be taxed at basic rate" then you would need to find a way to treat all methods the same no matter who makes the contribution or how the mechanics work (DB or DC) - but I don't comment on DB pensions as I don't know enough about them. As I understand it, there are a lot of political and contractual issues involved in any changes to public sector arrangements.

Where did this BIK idea come from? I haven't heard it anywhere other than in this thread.

gadgetmind

I've only seen the BIK idea here but it does sound like one of the few approaches that would actually be workable. Even then, it's all going to be *very* messy with/without sal sac to consider, and with DB adding complications.

It all just brings the point closer at which I say "sod you then!", withdraw from the labour market, let someone overseas pick up my work, and start sponging off the rest of you!

michaels

We are ruling out pension isas because they are likely to have a severely negative long term impact in say 25 years time.

In the short term they would boost tax take and potentially increase demand in the economy as people choose to spend already taxed income rather than save gross income.

The electoral cycle is 5 years, the shelf life of a party leader is less than 10.

I'm only saying.

TheTracker

Snakey wrote: »

Where did this BIK idea come from? I haven't heard it anywhere other than in this thread.

I first read about the idea here.

antrobus

Snakey wrote: »

....Where did this BIK idea come from? I haven't heard it anywhere other than in this thread.

It's simple logic. I have made the same point before whenever the same question has arisen.

Restrictions on the tax relief available on an employee's pension contributions can easily be avoided by switching to employer only pension contributions. Therefore, the employer's contribution needs to be taxable as a BIK to close that loophole.

Very bad news if you happen to be a top civil servant earning a £100k a year facing an employer contribution rate of 24.5%. Since it's top civil servants earning a £100k a year who advise the government on this sort of thing, there a good reasons for thinking that this won't happen.:)

OldBeanz

antrobus wrote: »

...

Very bad news if you happen to be a top civil servant earning a £100k a year facing an employer contribution rate of 24.5%. Since it's top civil servants earning a £100k a year who advise the government on this sort of thing, there a good reasons for thinking that this won't happen.:)

CS pay and pensions have been curtailed over the past few years. Now if we look at the pay and pensions of MP's...

gadgetmind

It would be grossly unfair for DC to be attacked with more taxes while DB is left along, so maybe that's exactly what will happen.

hugheskevi

[re taxing employer pension contribution as BIK]Very bad news if you happen to be a top civil servant earning a £100k a year facing an employer contribution rate of 24.5%. Since it's top civil servants earning a £100k a year who advise the government on this sort of thing, there a good reasons for thinking that this won't happen.

A useful case-study to illustrate the complexity involved.

Such an individual would be paying employee contributions of 7.35% and employer contributions of 24.5%. The contribution rates would be the same whether they were in the new post 2015 career average scheme or whether they were a protected member of one of older final salary pension schemes, despite the benefit structure and Normal Pension ages being completely different.

Looking at page 10 of the last scheme valuation, the required contribution is made up of:

3.6% - Deficit funding for period prior to 2012
0.1% - Deficit funding for period 2012-2015
22.8% - Average cost of benefits being provided across all the pension schemes being valued, and across all members

For a total of 26.5%, to which is added 0.15% administration costs and from which 5.6% is taken away, which is the average employee contribution rate. That is an overall average employer contribution rate required of 21.05%.

The employer contribution rates are then tiered by earnings, which makes more sense in a final-salary structure, but not much sense in a career-average model (as the cost of providing a pound of pension benefit is no greater just because member salary is higher in a career-average model, whereas in a final salary model higher earners are likely to have benefitted more from the pension scheme, and so to provide these members with a pension will have cost more than it would cost to provide the average member with a pension).

This raises a number of questions about simply using the employer contribution rate as the basis for a BIK charge:

• Why should this member pay a tax charge for employer deficit contributions?
• Why should the member pay a tax charge for employer administration charges?
• Why should the member pay a tax charge because their pension scheme decided to tier employer contribution rates by salary?
• Why should the member have the scheme average charge applied, when they will not be average (no member is 90% married at retirement, for example)?
• The valuation uses the discount rate of CPI+3%. Is this the appropriate rate to be using?
• Based on the figures in the valuation alone, the member should probably pay based on employer rate using a rate of 22.8% (cost of providing benefits) less 7.35% member contribution. That is a rate of 15.45%, a very different rate to the actual employer contribution of 24.5%. But it still is far from being correct, as the cost of providing benefits will vary significantly between individual members, and there will always be debate about the most appropriate discount rate to use, let alone all the other assumptions needed to value benefits on a consistent basis.

That is a lot of difficult questions to answer accurately, especially when all DB schemes would have to do whatever solution was arrived at. The result would either be a lot of expensive actuarial work to value all individual member benefits on a prescribed basis or an overly simplistic approach which would see some members paying far more or far less than they should be paying if the calculations were done accurately.

There are still about 3,500 - 4,000 private sector Defined Benefit schemes with members accruing benefits (mostly closed to new members) plus all the public sector schemes, so that is a huge number of schemes involved. (source: Purple Book 2015, pages 16 and 20, 64% of private sector DB schemes are either open or closed to new members - but open to future accrual - and there were 5,967 schemes in the dataset)

MDMD

Article in FT today suggests he is going for the flat rate. It acknowledges that it is going to annoy Conservative voters but that they have no other options as they can hardly defect to Corbyn.

Still doesn't really deal with the DB pension issues

http://www.ft.com/cms/s/0/abcb2a4e-bb81-11e5-b151-8e15c9a029fb.html?desktop=true#axzz3xOnU3Q6H