October Budget - Pension Tax Relief vs Salary Sacrifice

leosayer

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.

Exactly this.

With LISA-style arrangements (excluding the house-buying bit), the government can set and control the amount of tax relief paid on the way in and there would be no tax on the way out. In the past, there has been concern that people will withdraw the lot (and buy a Lamborghini) at age 55/57 but I'm not sure there's any evidence that has happened.

At a stroke it avoids all the complexity and differences surrounding salary sacrifice, net pay, tax free cash allowances, tapered annual allowance, MPAA, lump sum recycling, inheritance tax and the tax relief will be easily understood, unlike today.

The DB carve out will be tricky there are lots of considerations eg:
- Reintroduce the lifetime allowance for DB only or maybe an additional income tax rate for DB pensions over a certain threshold?
- Change tax free cash rules?
- Stop DB / AVCs links for tax free cash funding?

Grumpy_chap

BlackKnightMonty said:

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…

I don't think the two are analogous.

VAT is a simple tax to change, bringing a supply item into or out of the scope of VAT and changing the rate of VAT.  There have been times when the rate of VAT has changed several times in a tax year, even a time when there was a short term reduction in VAT to boost the economy with a pre-announced end-date.

Changing pension tax relief, contribution thresholds within the tax year is rather more complex as it is an Annual Allowance on contributions and the muted restriction of relief is based upon annual income.  Many people do not have regular income / pension contributions so the year cannot simply be cut into two halves.

Further, the whole issue of restricting pension contribution relief is more complex to alter and has potential unintended consequences.
What is the difference between an individual on £60k salary using SS for £10k pension contributions and then having earned income of £50k compared to an individual on £50k salary with 20% employer pension contributions?  If the former is subject to restrictions on the tax relief but the later is not, one can assume that employers will change contracts where it suits to fit in the later scenario.

BlackKnightMonty

Grumpy_chap said:

BlackKnightMonty said:

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…

I don't think the two are analogous.

VAT is a simple tax to change, bringing a supply item into or out of the scope of VAT and changing the rate of VAT.  There have been times when the rate of VAT has changed several times in a tax year, even a time when there was a short term reduction in VAT to boost the economy with a pre-announced end-date.

Changing pension tax relief, contribution thresholds within the tax year is rather more complex as it is an Annual Allowance on contributions and the muted restriction of relief is based upon annual income.  Many people do not have regular income / pension contributions so the year cannot simply be cut into two halves.

Further, the whole issue of restricting pension contribution relief is more complex to alter and has potential unintended consequences.
What is the difference between an individual on £60k salary using SS for £10k pension contributions and then having earned income of £50k compared to an individual on £50k salary with 20% employer pension contributions?  If the former is subject to restrictions on the tax relief but the later is not, one can assume that employers will change contracts where it suits to fit in the later scenario.

Schools have only until January to adjust budgets to soften the impact for parents. It’s more than a simple tweak of the VAT percentage. It’s all happening very fast.

What we can learn from this is that ideology trumps practical logistics. So don’t hold your breath when it comes to delaying pension tax changes…

Pat38493

A few things that don't seem to be discussed much:

- Possibly they will announce the long vaunted further increase to SP age for some future date.

- Increase of the age that you can access pension benefits again from 57 to 59 from some future date.

- MPAA will be made more strict (e.g. any access to any kind of pension benefits at all triggers MPAA, or accessing DB pension triggers MPAA, or using more than a certain amount of your TFC triggers MPAA).

- Introducing different tax bands (and%) for pensions/pensioners.

From discussions I had with colleagues in other countries, it doesn't seem like there are a lot of countries out there where you can flexibly access your pension benefits from quite an early age, whilst still benefitting from big tax breaks by continuing to contribute to your pensions.

hugheskevi

Pat38493 said:

A few things that don't seem to be discussed much:

- Possibly they will announce the long vaunted further increase to SP age for some future date.

That would be highly unlikely outside of the 5-year statutory review process. The previous administration said it would be reviewed within 2 years of the new Parliament following the Election, but the next statutory review could be as late as 2028. The current administration has not indicated whether they will review within 2 years or not.

Grumpy_chap

BlackKnightMonty said:

Schools have only until January to adjust budgets to soften the impact for parents. It’s more than a simple tweak of the VAT percentage. It’s all happening very fast.

"Softening the impact" is a choice the schools are making.  It may also be "spin" while the schools work out how to use the VAT change as a cover for an increase in fees.  The increase should be less than 20% given the schools can now reclaim input VAT whereas they could not before.

I will not comment on the issue of school fees again in this thread as it risks derailing from the topic and also risks political comments (which this thread has done well to avoid so far).  There are other threads where the subject of VAT on school fees is discussed.

From a basic taxation point of view, changes to VAT are simple and have precedent for rapid implementation without being tied to the tax year.  Changes to pension contribution relief is far more complex and does not, so far as I am aware, have precedent for change within the tax year given thresholds are set by reference to annual data.

Sea_Shell

Pat38493 said:

A few things that don't seem to be discussed much:

- Possibly they will announce the long vaunted further increase to SP age for some future date.

- Increase of the age that you can access pension benefits again from 57 to 59 from some future date.

- MPAA will be made more strict (e.g. any access to any kind of pension benefits at all triggers MPAA, or accessing DB pension triggers MPAA, or using more than a certain amount of your TFC triggers MPAA).

- Introducing different tax bands (and%) for pensions/pensioners.

From discussions I had with colleagues in other countries, it doesn't seem like there are a lot of countries out there where you can flexibly access your pension benefits from quite an early age, whilst still benefitting from big tax breaks by continuing to contribute to your pensions.

I currently squeak in to being able to access my pension at 55. (Counting the days 😉)

I'm really hoping they don't pull that change to 57 forwards. ☹️

As many know, I'm already retired, but it would put a detour in our grand plan.

BlackKnightMonty

Grumpy_chap said:

BlackKnightMonty said:

Schools have only until January to adjust budgets to soften the impact for parents. It’s more than a simple tweak of the VAT percentage. It’s all happening very fast.

"Softening the impact" is a choice the schools are making.  It may also be "spin" while the schools work out how to use the VAT change as a cover for an increase in fees.  The increase should be less than 20% given the schools can now reclaim input VAT whereas they could not before.

I will not comment on the issue of school fees again in this thread as it risks derailing from the topic and also risks political comments (which this thread has done well to avoid so far).  There are other threads where the subject of VAT on school fees is discussed.

From a basic taxation point of view, changes to VAT are simple and have precedent for rapid implementation without being tied to the tax year.  Changes to pension contribution relief is far more complex and does not, so far as I am aware, have precedent for change within the tax year given thresholds are set by reference to annual data.

I think you are putting a great deal of faith into tax change complexity delaying the onset of any policy change.

MK62

Scrapping the LTA had all sorts of complexities.......some it appears they hadn't even thought of......didn't stop them going ahead with it. Some of the issues are still unresolved........

MetaPhysical

What this very interesting discussion highlights is the vast complexity of the current pension system and that there are many severe unintended consequences involved in meddling.  I think this is why the status quo has been maintained for so long other that some tinkering with the limits.  That's what I think RR will do.  She may drop 60k allowance back to 40k for example - or less - or any touching of the DC pot in any way, including accessing TFC will trigger MPAA.

Many people, myself included, are using pensions to swerve the perverse marginal tax traps in our system or to move themselves into lower tax bands.  There could be new rules to stop this - with severe consequences to those affected such as losing child allowance.  If they did do this then at 57 I will retire as a chartered engineer immediately.  And there lies another problem, because such policy changes will affect the highest and most in demand parts of the workforce (with respect to lower paid and critical workers). Again, laws of unintended consequences apply.  Can we really afford mass retirement when there are such skills shortages in the economy?  To prevent that she could immediately raise the age at which one can touch private pensions from 55 to say 60.  That could have draconian consequences on the plans of older and less healthy people with hardly any notice.

For all these reasons, I think little will change other that some limits tinkering.  We shall see.