Rishi after Pensions Tax Relief

garmeg

zagfles said:

CSL0183 said:

Trying to figure out what it would mean if the government scrapped salary sacrifice and implemented a benefit in kind tax on employers contributions. 

To keep the maths simple, say you have a £60k salary with a 10% contribution, matched by employer at 10% through salary sacrifice. Effectively the employees salary is £66k with £12k going into the pension fund taking their income down to £54k. 

If a BIK was applied and a 25% relief added, would the maths below be correct?

£12k x 0.58 (42% relief) = £6,960. A flat 25% is then applied which takes the contribution upto £8,700 so a move to 25% flat rate would reduce the annual contribution by £3,300pa for the same take home pay. Not only is the employee getting hit with their own contribution but also that of their employers. 

So in order to keep the same £12k going into their fund, they would need to increase overall contributions to £16,550. (£16,550 x 0.58 = £9,600 x 1.25 = £12,000)

However, employer only pays a maximum of 10% of salary (£6k) so the employee would have to put in £10,550 (17.6%) to get back to where they were previously. An increase of £4,550 pa gross (£4,550 x 0.58 = £2,639pa net, so £220pm worse off in take home pay)
 

Add on top of that a likely increase to the tax bands post Covid so 41/42% then it will be even more severe. Not sure how that would kickstart the economy again, tax more, spend less. 

Is my understanding and the maths of BIK correct above?

No. It depends how it's done, but BIKs are usually taxable but not NI'able on the employee. So in the example above there would be £54k taxable pay plus a £12k BIK which would be taxed at 40%. If flat relief at 25% is given then presumambly there'd be a tax credit of 25% of £12k so the tax on the BIK would be 15% of £12k ie £1800. So in this example the employee would be £150pm worse off.

If the employee was a basic rate taxpayer including the BIK then the tax credit of 25% would be more than the tax paid at 20% and so the employee on say £40k would be 5% of £8000 better off ie £400 a year.

But this is all speculation as they could do it loads of different ways, this is just if they treated it like a normal BIK with a flat 25% tax relief, and sal sac was still allowed.

Any change is unlikely to be implemented in 2021/22 as it would be a significant change to salaries / pensions and payroll systems cannot be changed overnight.

Perhaps replacing DC pensions with LISAs could be the way to go but with contributions allowed after age 50.

Very few people pay large amounts into pensions so reducing the annual allowance to £20k probably wouldnt raise much revenue.

zagfles

garmeg said:

zagfles said:

CSL0183 said:

Trying to figure out what it would mean if the government scrapped salary sacrifice and implemented a benefit in kind tax on employers contributions. 

To keep the maths simple, say you have a £60k salary with a 10% contribution, matched by employer at 10% through salary sacrifice. Effectively the employees salary is £66k with £12k going into the pension fund taking their income down to £54k. 

If a BIK was applied and a 25% relief added, would the maths below be correct?

£12k x 0.58 (42% relief) = £6,960. A flat 25% is then applied which takes the contribution upto £8,700 so a move to 25% flat rate would reduce the annual contribution by £3,300pa for the same take home pay. Not only is the employee getting hit with their own contribution but also that of their employers. 

So in order to keep the same £12k going into their fund, they would need to increase overall contributions to £16,550. (£16,550 x 0.58 = £9,600 x 1.25 = £12,000)

However, employer only pays a maximum of 10% of salary (£6k) so the employee would have to put in £10,550 (17.6%) to get back to where they were previously. An increase of £4,550 pa gross (£4,550 x 0.58 = £2,639pa net, so £220pm worse off in take home pay)
 

Add on top of that a likely increase to the tax bands post Covid so 41/42% then it will be even more severe. Not sure how that would kickstart the economy again, tax more, spend less. 

Is my understanding and the maths of BIK correct above?

No. It depends how it's done, but BIKs are usually taxable but not NI'able on the employee. So in the example above there would be £54k taxable pay plus a £12k BIK which would be taxed at 40%. If flat relief at 25% is given then presumambly there'd be a tax credit of 25% of £12k so the tax on the BIK would be 15% of £12k ie £1800. So in this example the employee would be £150pm worse off.

If the employee was a basic rate taxpayer including the BIK then the tax credit of 25% would be more than the tax paid at 20% and so the employee on say £40k would be 5% of £8000 better off ie £400 a year.

But this is all speculation as they could do it loads of different ways, this is just if they treated it like a normal BIK with a flat 25% tax relief, and sal sac was still allowed.

Any change is unlikely to be implemented in 2021/22 as it would be a significant change to salaries / pensions and payroll systems cannot be changed overnight.

Perhaps replacing DC pensions with LISAs could be the way to go but with contributions allowed after age 50.

Very few people pay large amounts into pensions so reducing the annual allowance to £20k probably wouldnt raise much revenue.

I doubt they'll want to change it that quick anyway. Probably won't happen at all in the near future, we've speculated about it for years here.

Mick70

I think it will drive more people to invest in property and move away from traditional pensions , an increasing trend already to buy a second home and let it out 

CSL0183

Mick70 said:

I think it will drive more people to invest in property and move away from traditional pensions , an increasing trend already to buy a second home and let it out 

They have really tightened down on that too now though so it’s not the money tree that it once was. First of all you now have the 2nd home tax, 3% in England, 4% in Scotland on top of normal stamp duty. Then there’s tightening of the BTL tax relief as per below...

https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

Then at the end, there’s the CGT on sale of the house. Add in all the stress of being a landlord for all those years, the upkeep of the property, repairs, dodgy tenants and so on, it’s enough to put a lot of people off. 

foofi22

CSL0183 said:

Mick70 said:

I think it will drive more people to invest in property and move away from traditional pensions , an increasing trend already to buy a second home and let it out 

They have really tightened down on that too now though so it’s not the money tree that it once was. First of all you now have the 2nd home tax, 3% in England, 4% in Scotland on top of normal stamp duty. Then there’s tightening of the BTL tax relief as per below...

https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

Then at the end, there’s the CGT on sale of the house. Add in all the stress of being a landlord for all those years, the upkeep of the property, repairs, dodgy tenants and so on, it’s enough to put a lot of people off. 

Unfortunately a lot of people will overlook any downsides, or not even acknowledge them, because property is seemingly viewed as a guaranteed winner or easy route to riches - maybe it was once in the past?

Some of my colleagues have said "my home is my pension" - they didn't understand my concern when I asked how the house was going to buy their shopping.

zagfles

CSL0183 said:

Mick70 said:

I think it will drive more people to invest in property and move away from traditional pensions , an increasing trend already to buy a second home and let it out 

They have really tightened down on that too now though so it’s not the money tree that it once was. First of all you now have the 2nd home tax, 3% in England, 4% in Scotland on top of normal stamp duty. Then there’s tightening of the BTL tax relief as per below...

https://www.which.co.uk/money/tax/income-tax/tax-on-property-and-rental-income/buy-to-let-mortgage-tax-relief-changes-explained-atnsv0j6j782

Then at the end, there’s the CGT on sale of the house. Add in all the stress of being a landlord for all those years, the upkeep of the property, repairs, dodgy tenants and so on, it’s enough to put a lot of people off. 

As well as all that, house prices have fallen in real terms over the last 15 years or so. I'm sure you can still invest successfully in property if you know what you're doing, but nobody with any sense believes the old fashioned myth that you can't go wrong with property.

Albermarle

but nobody with any sense believes the old fashioned myth that you can't go wrong with property.

However clearly a lot of people still do . Most of it is down to the fact that property is easy to understand . You can see/feel it and people are very good at believing what they want to believe and  ignoring the negatives .

LHW99

One aim of autoenrollment (and NSP) seemed to be to reduce the amount of pension credit / benefits required to be paid out in future. It would be a pity for any changes to drive people away from pensions into the "I'll spend it all now" mindset.

zagfles

Albermarle said:

but nobody with any sense believes the old fashioned myth that you can't go wrong with property.

However clearly a lot of people still do . Most of it is down to the fact that property is easy to understand . You can see/feel it and people are very good at believing what they want to believe and  ignoring the negatives .

Which is why I said "nobody with any sense". Lots of people have no sense! Usually the sort of people that say things like "I don't trust pensions after Maxwell, all you hear about with pensions is people losing the lot" etc.

The concept of a property may be easy to understand but investing in property is not. Apart from the pure financial aspect eg cost, likely returns, yields, rental market, taxes etc, understanding stuff like tenants rights,  landlord obligations, what to do if a tenant doesn't pay rent, damages the property, breaks the rules eg gets a dog which uses the house as a toilet etc, how to evict (and how long it takes!). There so much to "understand", far more than investing in a simple pension or ISA. And far more risk, especially a geared investment in a single property. 

nigelbb

Why the mad rush to cut government spending by tax rises & a public sector pay freeze?  It would be nice to tidy up all the tax avoidance schemes like salary sacrifice & the self-employed paying themselves dividends rather than salary but that is a secondary issue. The coronavirus pandemic is a once in a lifetime event akin to a war & a once in a lifetime event so the government should fund it over the course of a lifetime. According to the BBC the cost of government borrowing this year will be £372 billion. We have historically low interest rates at present so paying back that debt over the next eighty years amounts to less than £5 billion per year. The government borrowed £55 billion last year so an increase of under 10% will barely be felt.

https://www.bbc.co.uk/news/business-52663523