October Budget - Pension Tax Relief vs Salary Sacrifice

C4rlos12345678

After reading the articles below, I came to MSE to ask the same question as OP then found his thread. 

https://www.theguardian.com/money/article/2024/aug/26/rachel-reeves-raise-10bn-peducing-pension-tax-relief-fabian-society

https://www.theguardian.com/money/article/2024/aug/21/what-personal-tax-rises-might-rachel-reeves-introduce-to-ease-uk-deficit

https://www.pkf-francisclark.co.uk/budget-expectations-what-have-we-learnt-from-keir-starmers-statement-on-27-august/

I hope I am wrong but I have a sneaky suspicion Tax Relief (and Salary Sacrifice) would be targeted - It'll be hitting 'high earners' the most after all and goes with the Labour narrative 😟

Regarding SS, and someone can say otherwise, taking a cut of saved NI will be a quick win by the govt and fairly easy to implement.

For high hanging fruit, surely the super rich shenanigans of avoiding CGT and IHT also has to be looked at? That'll bring down the £22billion sharply if implemented rigorously

Grumpy_chap

C4rlos12345678 said:

I hope I am wrong but I have a sneaky suspicion Tax Relief (and Salary Sacrifice) would be targeted - It'll be hitting 'high earners' the most after all and goes with the Labour narrative 😟

I am not sure it is as simple as that as SS allows an individual that would otherwise be "high earner" to become a "low earner".  Quite possible to earn £60k but SS £10k to pension and £5k to EV and be comfortably a "low earner" afterwards.

C4rlos12345678 said:

For high hanging fruit, surely the super rich shenanigans of avoiding CGT and IHT also has to be looked at? 

CGT and IHT are not solely the preserve of the "super rich"

westv

I really don't think we will see anything to discourage pension saving.
It's more likely we will see the current freeze on personal allowances extended or even a reduction in them.

MK62

Perhaps curbing "excessive" pension saving might be a good thing for the country........especially if the primary purpose of at least some of that saving is simply avoiding tax (in it's various forms). I know some will argue that pension saving is simply deferring tax, but it's more complex than that.......much of the money which might be taxed at 42% today (for example) will only be taxed at 20% later on (less if you include TFLS effects). No problem with people doing this atm of course, as it's within the rules, but perhaps it's those rules we should be looking at.........

As for freezing allowances........fiscal drag affects everyone, but those at the lower end of the income scale will often feel those effects more acutely........pretty much the reverse of the desired effect.....but then we are into politics here, not necessarily fairness.

Of course, we need to wait and see what's actually in this upcoming "painful" budget first.......it could be a case of that old political trick of telling people it'll be really bad, and when it's not as bad as feared, it comes as a mildly "pleasant" surprise......

zagfles

C4rlos12345678 said:

After reading the articles below, I came to MSE to ask the same question as OP then found his thread. 

https://www.theguardian.com/money/article/2024/aug/26/rachel-reeves-raise-10bn-peducing-pension-tax-relief-fabian-society

https://www.theguardian.com/money/article/2024/aug/21/what-personal-tax-rises-might-rachel-reeves-introduce-to-ease-uk-deficit

I hope I am wrong but I have a sneaky suspicion Tax Relief (and Salary Sacrifice) would be targeted - It'll be hitting 'high earners' the most after all and goes with the Labour narrative 😟

Regarding SS, and someone can say otherwise, taking a cut of saved NI will be a quick win by the govt and fairly easy to implement.

For high hanging fruit, surely the super rich shenanigans of avoiding CGT and IHT also has to be looked at? That'll bring down the £22billion sharply if implemented rigorously

Some of those ideas are crackers. Reducing the PCLS? Would have to have transitional rules to avoid retrospective taxation (like when the LTA was reduced), and so any significant treasury benefit wouldn't be seen for decades. 

Employee NI on private pensions? Really? Double taxation for those who weren't in a SS scheme. Easily avoided by having multiple pensions, eg instead of one pension paying £25k, transfer half to another scheme and draw £12.5k from each. Result, no NI. Just like someone with 2 jobs each paying £12.5k will pay no NI. 

Ban SS for pensions? So someone in a gold plated public sector scheme where employer pension conts are something like 30%+ would remain completely free of NI whereas someone in a min AE scheme wouldn't be able to swap pay for pension to create a similar employer contribution. And an easy workaround would be a reverse SS scheme. Instead of employers offering a job paying £75k with £5k pension conts with the option of SS to increase pension at the expense of pay - offer a job paying £50k with £30k pension conts. Allow employees to take a cash alternative for some of the pension. Exactly that happens now with stuff like company cars, and is not caught by the 2017 changes to SS rules. 

zagfles

MK62 said:

Perhaps curbing "excessive" pension saving might be a good thing for the country........especially if the primary purpose of at least some of that saving is simply avoiding tax (in it's various forms). I know some will argue that pension saving is simply deferring tax, but it's more complex than that.......much of the money which might be taxed at 42% today (for example) will only be taxed at 20% later on (less if you include TFLS effects). No problem with people doing this atm of course, as it's within the rules, but perhaps it's those rules we should be looking at.........

As for freezing allowances........fiscal drag affects everyone, but those at the lower end of the income scale will often feel those effects more acutely........pretty much the reverse of the desired effect.....but then we are into politics here, not necessarily fairness.

Of course, we need to wait and see what's actually in this upcoming "painful" budget first.......it could be a case of that old political trick of telling people it'll be really bad, and when it's not as bad as feared, it comes as a mildly "pleasant" surprise......

Yes they're clearly playing that game at the moment.

Curbing excessive pension conts would be quite easy and could be done in a fair way, like I said earlier limit employer conts to around the level of the most generous public sector scheme eg 40% of salary. That would pave the way for flat rate relief, with employees still allowed a limit amount of SS (maybe 20% or so) and wouldn't have the complication of making employer pension conts a taxable benefit, which is a non starter due to the effect it'd have on NHS doctors etc. 

I think they could combine fiscal drag with a further NI reduction (to protect workers) and bringing back a age related tax allowance (to protect those over state pension age), and so raising taxes most heavily on those retired under SPA and those living off investment income.  

BlackKnightMonty

hugheskevi said:

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.

Lots of civil service jobs have a 27% employee contribution, and only a modest 5-6% employee contribution…

Grumpy_chap

MK62 said:

Perhaps curbing "excessive" pension saving might be a good thing for the country.

It is not clear what level you would classify as "excessive" pension saving, but it is worth remembering that as recently as this Spring both the current Government and the current Opposition were taking measures to retain workforce (particularly the medical profession were referenced) in work rather than taking premature retirement leaving a skills shortage.  The claimed reason for this premature retirement was the combination of the LTA and the AA so both were altered by the then Government.  One has to assume that the current Government can recall what they pressed for as recently as the Spring.

BlackKnightMonty

Grumpy_chap said:

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.

School fees VAT is coming in 1st January 2025. Don’t hold your breath…

hugheskevi

MK62 said:

Perhaps curbing "excessive" pension saving might be a good thing for the country........especially if the primary purpose of at least some of that saving is simply avoiding tax (in it's various forms). I know some will argue that pension saving is simply deferring tax, but it's more complex than that.......much of the money which might be taxed at 42% today (for example) will only be taxed at 20% later on (less if you include TFLS effects). No problem with people doing this atm of course, as it's within the rules, but perhaps it's those rules we should be looking at.........

I think this is the heart of the problem and has been exacerbated by recent changes to tax and pensions.

Paying higher rate tax used to be something that applied to only a small percentage of the workforce, but the very slow increase/freezing of the higher rate threshold has dragged far higher numbers into higher rate tax. So what used to a fairly small issue is now many magnitudes greater. That brings it to prominence in the media and also increases the costs involved of tax relief.

Pension freedoms have also made the position very stark for those aged 55 or older. Although there used to be alternatives to annuitisation, they were more difficult and less well understood than the fully flexible position we have today. That means that those at or approaching age 55 have a big incentive to plough huge amounts into a pension, basically whatever they can afford in many cases. This group is also likely to be at the peak of their earnings, so more likely to be higher rate taxpayers.

So we have the odd position that, via tax relief, we give a higher-rate taxpayer who can immediately access their pension a 41.7% uplift (85% net if drawn with basic rate from a pension, with 40% tax relief on way in, higher if sal sac involved) for putting their money into a pension. This is a hugely poor design to incentivise saving, as it is a straightforward tax break for older works to wash earnings through a pension. The Money Purchase Annual Allowance prevents the worst effects, but anyone with savings can just pile all their income into a pension later in life and reduce savings, or even live from borrowing and make a tax profit. That all means a shockingly targeted big tax break for older high earners in particular.