October Budget - Pension Tax Relief vs Salary Sacrifice

SamDude

There are many articles (and perhaps seeds being planted) about a 'raid' on pension tax relief in the October budget.

If this is implemented, and the current 40% relief is capped at 30% (or zero/other) I'm trying to thing how it would affect contributions via salary sacrifice which do not have/need the tax relief?

Do people think salary sacrifice schemes will be left alone, or would HMRC add an extra tax to claw back the (40-30%) difference?

resk

I first started taking an interest in pensions, and personal finance generally, in 2016, eight years ago.  Before every Budget in those eight years there have been clickbait-y rumours about pension tax relief getting scrapped or reduced, and it never does.  Don't worry about it.  

Pat38493

I'm not convinced that this is something that could be done quickly - I would guess that a lot of IT systems would need to be updated as all the PAYE current systems assume that any tax relief on pension contributions that is processed through the payroll, is at the taxpayer marginal rate.

I'm sure someone will correct me if I'm wrong, but I'm pretty sure that 30% flat rate tax relief or the elimination of 40% tax relief or whatever, can't be achieved just by changing a flag or a number in payroll systems - it requires changes to the application logic.

As such, I am guessing it would take at least a year for providers to be ready for such a change, which would then raise the question of how to stop people from maxing everything out in that one year, so they would have to have some kind of forestalling rules.

Whatever happens, you can be pretty sure it won't be exactly what you have guessed, so it's very difficult to plan ahead for these things.  e.g. you could decide to max out 40% pension contributions, but they might decide to lower the 40% tax threshold on pension payments in order to claw back some of the extra relief you got later (and I suspect this would be technically easier and quicker to achieve).  

SamDude

Thanks @Pat38493 - it makes sense that it wouldn't be an overnight switch.

There are so many scenarios where people can be caught out, e.g. if they have already maxed their annual contributions or have contractual payments that will be caught in the changes. On the technology side, I'm sure the platforms are working ahead and they can be ready for April if needed.

Personally I'm hoping that they are making it sound much worse that it will actually be so we all breathe a sigh of 'relief' when nothing is changed...

Pat38493

SamDude said:

Thanks @Pat38493 - it makes sense that it wouldn't be an overnight switch.

There are so many scenarios where people can be caught out, e.g. if they have already maxed their annual contributions or have contractual payments that will be caught in the changes. On the technology side, I'm sure the platforms are working ahead and they can be ready for April if needed.

Personally I'm hoping that they are making it sound much worse that it will actually be so we all breathe a sigh of 'relief' when nothing is changed...

On the other hand, I am pretty sure they are not working ahead at all - I can't see that private companies would spend money modifying their systems for something that might never happen, or that might turn out to be different to what they have assumed.

SamDude

Pat38493 said:

SamDude said:

Thanks @Pat38493 - it makes sense that it wouldn't be an overnight switch.

There are so many scenarios where people can be caught out, e.g. if they have already maxed their annual contributions or have contractual payments that will be caught in the changes. On the technology side, I'm sure the platforms are working ahead and they can be ready for April if needed.

Personally I'm hoping that they are making it sound much worse that it will actually be so we all breathe a sigh of 'relief' when nothing is changed...

On the other hand, I am pretty sure they are not working ahead at all - I can't see that private companies would spend money modifying their systems for something that might never happen, or that might turn out to be different to what they have assumed.

To rephrase what I meant - they wouldn't be 'implementing' any modifications, but business and change/project teams would certainly be looking about possible scenarios and discussing how they would address them.
(Source: I worked for a large bank where we had lots of What-if Brexit conversations when the referendum was announced in 2016) 

Albermarle

SamDude said:

There are many articles (and perhaps seeds being planted) about a 'raid' on pension tax relief in the October budget.

If this is implemented, and the current 40% relief is capped at 30% (or zero/other) I'm trying to thing how it would affect contributions via salary sacrifice which do not have/need the tax relief?

Do people think salary sacrifice schemes will be left alone, or would HMRC add an extra tax to claw back the (40-30%) difference?

It would be totally illogical, and manifestly unfair to exempt salary sacrifice schemes from a change in tax relief % that affected other ways of contributing .Probably to implement a 30% rate, salary sacrifice would have to be stopped in favour of the relief at source system.

Interestingly apart from this, salary sacrifice for pensions itself has not cropped up in any of these rumours.
It is effectively a loophole for employees and employers to avoid NI.
The widespread use of it is costing the Treasury Billions AFAIK.

hugheskevi

Albermarle said:

SamDude said:

There are many articles (and perhaps seeds being planted) about a 'raid' on pension tax relief in the October budget.

If this is implemented, and the current 40% relief is capped at 30% (or zero/other) I'm trying to thing how it would affect contributions via salary sacrifice which do not have/need the tax relief?

Do people think salary sacrifice schemes will be left alone, or would HMRC add an extra tax to claw back the (40-30%) difference?

It would be totally illogical, and manifestly unfair to exempt salary sacrifice schemes from a change in tax relief % that affected other ways of contributing .Probably to implement a 30% rate, salary sacrifice would have to be stopped in favour of the relief at source system.

Interestingly apart from this, salary sacrifice for pensions itself has not cropped up in any of these rumours.
It is effectively a loophole for employees and employers to avoid NI.
The widespread use of it is costing the Treasury Billions AFAIK.

Agreed - and then you get into the problem of dealing with schemes that are either non-contributory for members or a low contribution, but have a very high employer contribution rate. The obvious example would be the Armed Forces scheme, which has stated that member's pay is set to reflect the generous pension - which sounds exactly like salary sacrifice, just without any option not to sacrifice.

So if an employer offers a non-contributory scheme for members and, say, a 20% employer contribution, would that be okay? What if an employer offers new employees a selection of remuneration packages to choose from, and some have higher employer contribution rates and a lower employee contribution rate, would that be okay?

And how do you deal with public service pension schemes? A scheme may have a 5% employee contribution rate and a 30% employer contribution rate - would that be okay? If so, why couldn't a private sector DC scheme make employer contributions of 30% if they wished for some or all members?

Would you cap employer contributions, after which they are taxed? But what do you do about DB schemes, where rates are set at scheme rather than individual level? Just apply the scheme rate, even though it is probably manifestly wrong for the youngest and oldest members? Or force the scheme to value every member's accrual as is done (very crudely and inaccurately) for Annual Allowance?

There are so many issues caused that I suspect it would be easiest to move all DC to a LISA-style model and carve out DB. But that would be a huge unfairness between public and private sectors.

zagfles

I've mentioned it here before but a fairly simple and fair way they could move to flat rate relief is to limit employer pension contributions to the level of the most generous public sector scheme, perhaps something like 40% of salary. That would limit sal sac for typical DC schemes to something like 20-25% of salary depending on what the base employer conts are. 

Anything else would either be far too complicated or completely unfair. 

Mutton_Geoff

resk said:

I first started taking an interest in pensions, and personal finance generally, in 2016, eight years ago.  Before every Budget in those eight years there have been clickbait-y rumours about pension tax relief getting scrapped or reduced, and it never does.  Don't worry about it.  

For the first time since 2010, we have a labour government. Don't be surprised if there are big changes.

Grumpy_chap

It seems to me that any measures to cap pension contribution relief would have to be introduced from the next tax year (at the earliest) and, because of the complications, would possibly be longer than that.
Particularly when considering that Salary Sacrifice or pension can reduce taxable income into basic rate for individuals that would otherwise be on higher rate.