Pension tax relief

Bimbly

Employers save on paying employers' NI with salary sacrifice. This is not an inconsiderable sum. It encourages employer contributions and, I imagine, would cause huge problems if stopped.

Albermarle

NedS said:

Albermarle said:

Mick70 said:

Telegraph reporting that pension tax relief for middle earners (and higher) may well get cut back to basic 20%, kick in the teeth for some on here I guess 

does a salary sacrifice scheme get round this and high earners still get full tax relief using that ?  

The article says that pension tax relief costs £42.7 Billion pa , of which £22.9 billion is related to income tax and £19.8 billion related to NI. Presume the latter is due to salary sacrifice, but this is not mentioned anywhere in the article, and it seems very high. ( nearly as much as tax relief) so I suspect the figures are not accurate/badly reported
Apparently a reduction in 40% tax relief to 20% would save about £10 billion.

Of course this story surfaces on a regular basis, but might have more legs in the current situation? Although as already mentioned it is not simple to implement, and I would suspect if anything is announced on  Nov 17th, it will be light on detail and for implementation at some later date.

I too was shocked to see that the NI component was almost as high as that for tax relief. I've thought for a long thought they need to address that, as I do not believe it is right or fair to benefit from reduced or nil NI as a result of pension contributions through salary sacrifice. I guess the solution would be to make salary sacrifice illegal for pension purposes, and all pension contributions must be made in the normal way, either by net pay or relief at source arrangements - at which point it should be easier to introduce a flat rate of relief at 20% or whatever.

How they address DB schemes is a separate issue - maybe increase the employee's salaries over time and ask them to pay higher contributions to offset the rise, to make the tax/NI situation more equivalent to those on DC schemes and are not 'benefiting' from paying less NI or 40% tax on a lower salary.

If they can raise an instant £20bn from eliminating NI avoidance by stopping salary sacrifice, and another £10bn from removing 40% tax relief, then that goes a long way to plugging the £50bn gap right there and certainly places the burden on those most able to afford it in a fair way (really, why should some people get to pay less or no NI?). No previous government has had the b@lls to touch pension tax relief - maybe the current situation will give the current government enough incentive. What's the alternative - axe the triple lock and give pensioners less, axe inflation rises for those most vulnerable (pensioners and those on benefits), means-test state pension or disability benefits, cut the NHS budget even further and further increase waiting times, slash defence and educations budgets, slash local authority budgets and local services even further? None of which get close to raising £30bn that changes to the pension tax system could.

I very much doubt any change could be implemented immediately - at the earliest it would be next April.

This is also being discussed on another thread and another poster , who I will quote below, explains that the surprisingly large NI figure is not just down to salary sacrifice.

The figures seem to come from here: https://www.gov.uk/government/statistics/minor-tax-expenditures-and-structural-reliefs/estimated-cost-of-tax-reliefs-statistics

which describes the £19.8bn (2020-21) (section 7.21)  as

"Payments by way of an employer’s contribution towards a registered pension scheme or by way of any benefit pursuant to a registered pension scheme are disregarded in the calculation of earnings for the purposes of earnings-related contributions."
and
"The relief is a combination of National Insurance relief for employers on the pension contributions they make as well as the saving for individuals from the employers’ contributions not being treated as part of their gross income and subject to employee National Insurance contributions (in accordance with how individuals’ own pension contributions are treated)."

So it's the same concept as "salary sacrifice", but it's not the additional cost of voluntary contributions, it's the effect of all employer contributions.

2nd_time_buyer

1) Whether or not an employer offers salary sacrifice is fairly arbitrary. This is not fair.

2) High earners get a higher rate of tax relief. This is also not fair.

Paying pension through salary sacrific is of greater benefit to basic rate tax payers due to the higher avoided NI contributions. For those eligible, this partially addresses the injustice of (2).

A flat rate of 30% for all (and banning salary sacrifice) would probably be palatable for most. My gut feeling is that it would still save the government a fair bit especially once you take into account the increased employer NI contributions.

...but you are still left with the DB issue.

Qyburn

Albermarle said:

The article says that pension tax relief costs £42.7 Billion pa , of which £22.9 billion is related to income tax and £19.8 billion related to NI. Presume the latter is due to salary sacrifice, but this is not mentioned anywhere in the article, and it seems very high. ( nearly as much as tax relief) so I suspect the figures are not accurate/badly reported
Apparently a reduction in 40% tax relief to 20% would save about £10 billion.
.

If total tax relief is £22.9B, then limiting 20% would only save £10B if nearly all tax relief is currently being paid at 40%. Using rough figures that would mean £50B contributions earning 40% relief and only £14.5 earning 20% tax relief. I can see that higher rate payers have more incentive and maybe more spare money to contribute, but is it really that much.

Dazed_and_C0nfused

Qyburn said:

Albermarle said:

The article says that pension tax relief costs £42.7 Billion pa , of which £22.9 billion is related to income tax and £19.8 billion related to NI. Presume the latter is due to salary sacrifice, but this is not mentioned anywhere in the article, and it seems very high. ( nearly as much as tax relief) so I suspect the figures are not accurate/badly reported
Apparently a reduction in 40% tax relief to 20% would save about £10 billion.
.

If total tax relief is £22.9B, then limiting 20% would only save £10B if nearly all tax relief is currently being paid at 40%. Using rough figures that would mean £100B contributions earning 40% relief and £14.5 earning 20% tax relief. I can see that higher rate payers have more incentive and maybe more spare money to contribute, but is it really that much.

It won't all be being paid specifically for higher rate relief though.

There are plenty who do anything they can to avoid HICBC. or tapered Personal Allowance. 

And probably to a much lesser degree to become eligible for Marriage Allowance or have a larger savings nil rate band.

MK62

HappyHarry said:

This comes up before every budget. As yet, no government has ever decided to cut the tax relief.

it would cause problems for those in DB pensions and those using salary sacrifice. 

There is also the key issue that people may stop saving into pensions if they are only gaining 20% tax relief on contributions, but face a potential 40%/45% tax on withdrawals.

What do you think they would do with the money instead?

Pensions_matter_2

I imagine that both cutting pensions tax relief and changing the NI/salary sacrifice rules, suddenly (assuming the government can resolve the issue for DB schemes), could cause mayhem. On the other hand, giving notice of such changes could result in many taxpayers (those who can afford it at least) raising their contributions significantly to max out on the current more beneficial rules while they can in the short window before the change, adding significantly to the tax relief/NI savings costs to the government in this tax year. A tricky balancing act perhaps.

Dazed_and_C0nfused

Scrapping carry forward would be relatively straightforward and could be sold as generally not adversely impacting those at the lower end of the income scale.

Would also help simplify pensions a little.

Simes122

Audaxer said:

HappyHarry said:

There is also the key issue that people may stop saving into pensions if they are only gaining 20% tax relief on contributions, but face a potential 40%/45% tax on withdrawals.

That could be an issue, but I was thinking that many people in the higher tax band currently getting 40% tax relief, would probably only be drawing down enough to pay 20% tax when they do start drawing down their DC pensions?

Maybe I’m an outlier, but live in Scotland where the HR tax threshold is lower and the rate 41% above £43,662.  I’ll have two DB pensions that put me just under that threshold after the cpi rise in April, and a DC pot which I’m filling as hard as I can.  Partly as tax management, and partly for my retirement.   Anything I put in to that is relieved at 41% now, and I’ll pay 41% on it on the way out.  I would stop work immediately if they changed the relief, as I’d be paying 20% tax going in and 41% coming out.   Pension tax relief is tax deferred, not avoided.   The complexity of dealing with this as simply as cancelling HR tax relief means it would be a nightmare to administer, unfair for many people.  Think doctors, surgeons etc.  there would be no point in working anymore - not great.

Simes122

Mick70 said:

Maybe get rid of the NI loophole but keep the actual tax relief ?

Is the NI a loophole?  NI is not payable in retirement- I’m sacrificing salary now, for when I’m a pensioner.  When I’d have no liability for NI.