Potential New flat rate relief and Salary Sacrafice

Triumph13

If they are mad enough to try and introduce flat rate then, I wouldn't be surprised to see them introduce it from April 2016 for private pensions but April 2017 for company ones.
Private pensions are easy as all they have to do is change how much relief they pay over / how much tax a HRT payer can reclaim.
Company pensions would horribly complicated and they would have to give a year's notice for companies to put the processes in place and/or collect and submit data.

dunstonh

Salary sacrifice was always used in a minority of cases. It never used to cost the treasury much. It is now used by many auto-enrolment schemes as a matter of course. The pension tax relief bill went up £4 billion in one year. So, there is a reason why they want to cull it. It is possible to get over 70% effective relief in some cases.

Introducing it from April 2016 could make sense as it could see all the rules coming in this April made obsolete in one go. Taking pension tax relief away from income tax and putting it on the product would solve a lot of things in one go as far as the treasury is concerned (reduce tax credits as pension contributions wouldn't reduce income. Prevent highest earners using pensions to reduce income without the need for tapering, prevent people using pensions to get child beneft etc)

There is a lot unknown at this stage and if they keep the leaks of information to a minimum (as they did last year) then we wont know until budget day.

jamesd

adam81 wrote: »

Oh right so completely not understood that then. So no relief is factored in at all?

The relief is there but at your tax rate. The possible proposal is to give extra pension relief above your income tax rate. Salary sacrifice as it works now doesn't do that, so you wouldn't get the extra basic rate relief. On the other hand, if it works as it does now, you'd continue to get 40% income tax relief even if the pension income tax relief was reduced, because salary sacrifice just pays you less income, and that does save you the 40%.

Which is presumably part of why PensionTech expects something to also be done about salary sacrifice and presumably other forms of employer contribution.

adam81 wrote: »

If I sacrifice £5,000 (at HRT) of my salary for example, £5,000 would hit my pension account would it not? (Plus of course and employer contributions) If I'd not sacrificed this I would have been taxed at 40% on this so taking £3,000.

Right, under current rules.

adam81 wrote: »

In effect though going forward you'll still get 40% as you were never taxed on it?

Right, under current rules.

But we're discussing rules changes that might also affect salary sacrifice... so we just don't know until after the Budget what will really happen. We can discuss it but it's only a month away so wait and see has merit vs endless speculation.

However, I did arrange myself to have salary sacrifice set up to have me getting around the £40k annual contribution limit put into my pension starting from January payroll this year. Much of that is basic rate band where currently both higher rate and basic rate band get me more than the proposals I've seen would get me. Part of the reason for that was that sometimes a rule change can be written to affect only new salary sacrifice arrangements, not existing ones. So this either might not be affected or might be able to run longer than a new one if the Chancellor says magic words like "from midnight tonight all new salary sacrifice arrangements... whatever". Of course that's not the main reason, the main reason is that it make sense for me to have that much going into my pension.

jamesd

PensionTech wrote: »

Can you explain what you mean by this? Salary sacrifice contributions, and normal employer contributions generally, effectively receive tax relief at the employee's marginal rate by virtue of not being paid as taxable income or included as a taxable benefit when working out the employee's tax code. A flat rate would surely have to be applied to employer contributions as well - otherwise there would be a disadvantage to BR taxpayers of having their employer contribute vs taking it as salary and paying employee contributions, and an advantage to HR taxpayers of the same thing.

Just depends how it's done. I was writing as if salary sacrifice rules aren't changed to get the new relief rate, whatever that might be, if it happens. I agree with you that it's entirely possible that the Chancellor will get into the very, very messy business of doing something about employer contributions.

Wonder how many strikes we see in the public sector if he does and if it affects all those public sector DB pension employer contributions...

zagfles

PensionTech wrote: »

Can you explain what you mean by this? Salary sacrifice contributions, and normal employer contributions generally, effectively receive tax relief at the employee's marginal rate by virtue of not being paid as taxable income or included as a taxable benefit when working out the employee's tax code. A flat rate would surely have to be applied to employer contributions as well - otherwise there would be a disadvantage to BR taxpayers of having their employer contribute vs taking it as salary and paying employee contributions, and an advantage to HR taxpayers of the same thing.

You forget about the NI relief with sal sac. If there is a "top up" of relief for basic rate taxpayers of say 12%, and it only applied to personal pensions and employee contributions taken via net pay, then sal sac would not be disadvantaged it would be the same for the employee (and better for the employer as they save NI).

zagfles

jamesd wrote: »

Just depends how it's done. I was writing as if salary sacrifice rules aren't changed to get the new relief rate, whatever that might be, if it happens. I agree with you that it's entirely possible that the Chancellor will get into the very, very messy business of doing something about employer contributions.

Wonder how many strikes we see in the public sector if he does and if it affects all those public sector DB pension employer contributions...

Why? Flat rate would likely mean that basic rate taxpayers would get a boost on their pension contributions. Are there going be strikes because the low-average paid are better off and high paid are worse off?

Mistermeaner

If they change tax on the way in surely they must change it on the way out too or well have paid tax twice..... Hardly seems fair

Getting rid of 25% lump sum would be fairer and neater.... Of course that would upset the voter's near retirement vs the young savers....

Interesting to see how db is managed if DC is attacked.... Surely all db members must be asked to pay more but arguably that's a scheme issue rather than a tax one..

taylornj

Another paper on the subject.

http://www.cps.org.uk/publications/reports/q/ref-619/

jamesd

zagfles wrote: »

Why? Flat rate would likely mean that basic rate taxpayers would get a boost on their pension contributions. Are there going be strikes because the low-average paid are better off and high paid are worse off?

Say the single rate is set at 30% and it is made to apply to salary sacrifice. The current basic rate range salary sacrifice level is 20% income tax plus 12% employee NI and maybe plus some of the employer NI, leaving the basic rate employee worse off by 2% plus any employer NI contribution they get.

It's not a boost for the basic rate taxpayers in the public sector salary sacrifice systems, it's a cut.

Always assuming it's done that way, of course. No way to know at this point.

Then there's that extra perhaps 15% of pay that a defined benefit scheme is likely to be paying in. That's a built in sacrifice to pension instead of salary int eh base contract terms. Treat that also as pay being sacrificed and cut it's NI relief and that's a further cut to the employee or cost increase to the employer.

I assume that it won't be done to make things consistent across private and public sector but instead some fudge will be used so that those in the private sector with mostly money purchase pensions lose out more while those in mostly public sector defined benefit pensions lose out less or not at all.

bigadaj

zagfles wrote: »

Why? Flat rate would likely mean that basic rate taxpayers would get a boost on their pension contributions. Are there going be strikes because the low-average paid are better off and high paid are worse off?

But that would only apply, certainly in straightforward manner, to dc pensions. To maintain any sort of logic, not certain for pensions I know, then the employer contributions would also be taxed for db pensions, likely making the db pension schemes more expensive for even the lower paid workers in the public sector.