Good News For A Small Number of Pension Savers On Low Pay

Secret2ndAccount

Most employers operate either a Relief at Source or Salary Sacrifice method for pension contributions. This helps employees avoid paying income tax on their contributions.
A smaller number of schemes use the Net Pay method. With this method, your pension contribution is deducted from your payslip before the tax is calculated. For most people that works fine. If, for example, you earn 20k, and pay 2k into a pension, you will only pay the basic rate tax on 18k. However, what if you are a low earner? A person on 10k, who pays 1k into a pension sees their net pay reduced to 9k. But this person is below the £12570 income tax threshold. They are paying no income tax, so the reduction doesn't save them any tax. Contrast this with someone who pays 1k into a SIPP, and automatically receives a £250 top-up into the SIPP to account for the income tax (even though they might never have paid any).
The finance bill, currently making its way through parliament, will require HMRC to identify individuals who have lost out in this way, and pay them back the tax on their pension contributions. Good news for some low paid workers who are making an effort to save into a pension.
There will be no effort to go back and make restitution to those who have been losing out for ten years, but a least the situation will be fairer for 2024 and beyond. Could be a bit of a task for HMRC to figure out who is owed what.

hugheskevi

Secret2ndAccount said:

Could be a bit of a task for HMRC to figure out who is owed what.

Indeed, Government analysis suggests that by the end of 2026/27 a total of £25 million will have been refunded.

Sadly, that comes at an administrative cost of £38 million for HMRC.

dunstonh

When you look at the way salary sacrifice has ballooned over the last two decades, it surprises me that there haven't been serious attempts to close that loophole.   It has turned into one of the major costs of pensions to the treasury, and most consumers are not even aware of it.

Malthusian

dunstonh said:

When you look at the way salary sacrifice has ballooned over the last two decades, it surprises me that there haven't been serious attempts to close that loophole.   It has turned into one of the major costs of pensions to the treasury, and most consumers are not even aware of it.

Because applying National Insurance to employer pension contributions would mean an effective 3% pay cut to our angels in the NHS and others who currently benefit from high employer contributions. (15.05% tax on 20.6% of pensionable pay per year = 3% out of your pay packet.) It would also have the biggest effect on the people at the Treasury who come up with new taxes (because they are highly paid and in public sector DB schemes).
For a shiny penny into your SIPP, tell me how you would sell a 3% pay cut for nurses (and similar pay cuts to everyone in the public sector) to the electorate. Then how you would simultaneously sell a massive extra annual tax bill to the people who decide how tax bills work. Ready, steady, go!
The alternative - to apply National Insurance to employer DC pension contributions only (thus ensnaring the greedy fat cat plumbers working via limited companies but not Nurse Ratchet or senior civil servants) is not any more politically viable.
It would be far easier just to cut the Annual Allowance again.

zagfles

Malthusian said:

dunstonh said:

When you look at the way salary sacrifice has ballooned over the last two decades, it surprises me that there haven't been serious attempts to close that loophole.   It has turned into one of the major costs of pensions to the treasury, and most consumers are not even aware of it.

Because applying National Insurance to employer pension contributions would mean an effective 3% pay cut to our angels in the NHS and others who currently benefit from high employer contributions. (15.05% tax on 20.6% of pensionable pay per year = 3% out of your pay packet.) It would also have the biggest effect on the people at the Treasury who come up with new taxes (because they are highly paid and in public sector DB schemes).
For a shiny penny into your SIPP, tell me how you would sell a 3% pay cut for nurses (and similar pay cuts to everyone in the public sector) to the electorate. Then how you would simultaneously sell a massive extra annual tax bill to the people who decide how tax bills work. Ready, steady, go!
The alternative - to apply National Insurance to employer DC pension contributions only (thus ensnaring the greedy fat cat plumbers working via limited companies but not Nurse Ratchet or senior civil servants) is not any more politically viable.
It would be far easier just to cut the Annual Allowance again.

It is possible to specifically target sal sac arrangements, they already did this in 2017, it's just they exempted pensions.

https://www.gov.uk/government/publications/optional-remuneration-arrangements/optional-remuneration-arrangements

Dazed_and_C0nfused

Secret2ndAccount said:

Most employers operate either a Relief at Source or Salary Sacrifice method for pension contributions. This helps employees avoid paying income tax on their contributions.
A smaller number of schemes use the Net Pay method. With this method, your pension contribution is deducted from your payslip before the tax is calculated. For most people that works fine. If, for example, you earn 20k, and pay 2k into a pension, you will only pay the basic rate tax on 18k. However, what if you are a low earner? A person on 10k, who pays 1k into a pension sees their net pay reduced to 9k. But this person is below the £12570 income tax threshold. They are paying no income tax, so the reduction doesn't save them any tax. Contrast this with someone who pays 1k into a SIPP, and automatically receives a £250 top-up into the SIPP to account for the income tax (even though they might never have paid any).
The finance bill, currently making its way through parliament, will require HMRC to identify individuals who have lost out in this way, and pay them back the tax on their pension contributions. Good news for some low paid workers who are making an effort to save into a pension.
There will be no effort to go back and make restitution to those who have been losing out for ten years, but a least the situation will be fairer for 2024 and beyond. Could be a bit of a task for HMRC to figure out who is owed what.

I noticed in the explanatory notes that the new payment is going to be taxable so some will get a payment and then, depending on their circumstances, have to pay extra tax as a result 😳

AlwaysLearnin

Wonder how a taxable (lump?) payment will impact any income related benefits that the low earners might be on...?

NedS

AlwaysLearnin said:

Wonder how a taxable (lump?) payment will impact any income related benefits that the low earners might be on...?

In the vast majority of cases, under Universal Credit regulations, any income tax rebate is treated as income at the point it is received. If it is going to negatively impact means-tested benefits, the recipient could simply pay the tax rebate into a pension (SIPP) and receive further tax relief on it.
It may make more sense for HMRC to pay any tax relief due directly into the pension fund in question, although that may not be possible for DB schemes.

AlwaysLearnin

NedS said:

AlwaysLearnin said:

Wonder how a taxable (lump?) payment will impact any income related benefits that the low earners might be on...?

In the vast majority of cases, under Universal Credit regulations, any income tax rebate is treated as income at the point it is received. If it is going to negatively impact means-tested benefits, the recipient could simply pay the tax rebate into a pension (SIPP) and receive further tax relief on it.
[Snip]

That might be simple for the sorts of people that frequent this forum board, but perhaps less so for many low income households out there.

michaels

zagfles said:

Malthusian said:

dunstonh said:

When you look at the way salary sacrifice has ballooned over the last two decades, it surprises me that there haven't been serious attempts to close that loophole.   It has turned into one of the major costs of pensions to the treasury, and most consumers are not even aware of it.

Because applying National Insurance to employer pension contributions would mean an effective 3% pay cut to our angels in the NHS and others who currently benefit from high employer contributions. (15.05% tax on 20.6% of pensionable pay per year = 3% out of your pay packet.) It would also have the biggest effect on the people at the Treasury who come up with new taxes (because they are highly paid and in public sector DB schemes).
For a shiny penny into your SIPP, tell me how you would sell a 3% pay cut for nurses (and similar pay cuts to everyone in the public sector) to the electorate. Then how you would simultaneously sell a massive extra annual tax bill to the people who decide how tax bills work. Ready, steady, go!
The alternative - to apply National Insurance to employer DC pension contributions only (thus ensnaring the greedy fat cat plumbers working via limited companies but not Nurse Ratchet or senior civil servants) is not any more politically viable.
It would be far easier just to cut the Annual Allowance again.

It is possible to specifically target sal sac arrangements, they already did this in 2017, it's just they exempted pensions.

https://www.gov.uk/government/publications/optional-remuneration-arrangements/optional-remuneration-arrangements

Job 1 Advert: 50k salary, 10% employer pension contribution
Job 2 Advert: 45k Salary, 22% employer pension contribution

Which includes 'taxable salary sacrifice'?

Dazed_and_C0nfused

michaels said:

zagfles said:

Malthusian said:

dunstonh said:

When you look at the way salary sacrifice has ballooned over the last two decades, it surprises me that there haven't been serious attempts to close that loophole.   It has turned into one of the major costs of pensions to the treasury, and most consumers are not even aware of it.

Because applying National Insurance to employer pension contributions would mean an effective 3% pay cut to our angels in the NHS and others who currently benefit from high employer contributions. (15.05% tax on 20.6% of pensionable pay per year = 3% out of your pay packet.) It would also have the biggest effect on the people at the Treasury who come up with new taxes (because they are highly paid and in public sector DB schemes).
For a shiny penny into your SIPP, tell me how you would sell a 3% pay cut for nurses (and similar pay cuts to everyone in the public sector) to the electorate. Then how you would simultaneously sell a massive extra annual tax bill to the people who decide how tax bills work. Ready, steady, go!
The alternative - to apply National Insurance to employer DC pension contributions only (thus ensnaring the greedy fat cat plumbers working via limited companies but not Nurse Ratchet or senior civil servants) is not any more politically viable.
It would be far easier just to cut the Annual Allowance again.

It is possible to specifically target sal sac arrangements, they already did this in 2017, it's just they exempted pensions.

https://www.gov.uk/government/publications/optional-remuneration-arrangements/optional-remuneration-arrangements

Job 1 Advert: 50k salary, 10% employer pension contribution
Job 2 Advert: 45k Salary, 22% employer pension contribution

Which includes 'taxable salary sacrifice'?

In respect of pension contributions neither.