October Budget - Pension Tax Relief vs Salary Sacrifice

Grumpy_chap

warrenb said:

if they were to equalise CGT with IT 

Again, this is not simple.  It could force no-one to invest in BTL and such-like (affecting the future supply of rental properties) or force current LLs to hold onto BTL even if they would prefer to sell.

Let's suppose an individual purchased a property in 2015.
They sell in 2025 realising a capital gain of £100k.

If that is taxed as income in the single tax year, that is almost certainly going to be at 45% rate, quite possibly some at the 60% effective rate as personal allowance is withdrawn.  Very rarely will any of it be at 20% rate though some may have it at 40% rate.

However, that has not really been income all in one year but over ten years.  So, will the individual be able to re-open all the past 10-years of tax returns and apportion the £100k across the years? 
How will that apportionment be structured? 
Does it have to be straight-line, so £10k per year? 
Or can it be profiled as the individual chooses? 
Or does the individual need to look at an index and apply a different gain for each year?
Why should income from capital gain over ten years, not be treated in the same way as income from savings interest that are repeatedly reinvested over the ten years?

If CGT is to be taxed at income tax rates, will the individual be able to treat this as "earned income" and use the CGT to contribute to pension so reducing tax liability?

CGT has to be paid quickly after realising the gain.  Yet income tax rates are based on a tax year and the return and payment are not due until some months later.  What marginal rate is applied for CGT gain of £100k realised in, say May?  The individual's total income position will not be confirmed until the following April.  The individual may even realise losses that can be set off against the capital gain.  Quite likely that whatever CGT is applied at that point is not the correct calculation.

Nothing is simple.

warrenb

CGT should be equalised with the current marginal rate. I understand that if someone slips into another tax bracket during the year this will cause issues, but can be dealt with as a tax return. The rate is based on income and not capital gain.

snowlaser

"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."

I don't think it was a CONCERN at government level though - rather the then Lib Dem pensions minister Steve Webb said if they wanted to withdraw it all and buy a Lamborghini that was up them, as it was their money!

The emphasis was on "Pensions Freedom" i.e. exactly the ability to do what people wanted to with THEIR money.

Now I think it's more about the government trying to raise taxes, but in a way that doesn't have unintended negative consequences.  It's hard to attack pensions in a way that doesn't do that (for example - when the Tories cut the Lifetime Allowance and then found hundreds of doctors taking early retirement to avoid it).

Sea_Shell

snowlaser said:

"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."

I don't think it was a CONCERN at government level though - rather the then Lib Dem pensions minister Steve Webb said if they wanted to withdraw it all and buy a Lamborghini that was up them, as it was their money!

The emphasis was on "Pensions Freedom" i.e. exactly the ability to do what people wanted to with THEIR money.

Now I think it's more about the government trying to raise taxes, but in a way that doesn't have unintended negative consequences.  It's hard to attack pensions in a way that doesn't do that (for example - when the Tories cut the Lifetime Allowance and then found hundreds of doctors taking early retirement to avoid it).

Ah, the Law of Unintended Consequences.

Let's pull this lever....oh 💩, I didn't expect THAT to happen!! 

When Stevie Wonder could see that's just what would happen.

None so blind as a politician with their hand on the levers. ☹️

Grumpy_chap

[Deleted User] said:

just put a cap on employer pension contributions to a money purchase arrangement, 

Creating further and growing disparity between money purchase DC schemes and (mostly public sector) final salary DB schemes...

zagfles

[Deleted User] said:

warrenb said:

I think one way they could claw back some from SS is to make it subject to NI (which should have the cuts reversed that were given in the last government). The problem they have is if they withdraw SS completely, what is to stop employers saying your salary is now xyz and we will contribute 30% to your pension instead of our current rate (making it the same contribution as it is at present).

It's trivial from a legislative perspective to stop salary sacrifice.

There's already anti-avoidance legislation that deals with most non-pension salary sacrifice.  And it's pretty easy to stop any other funny business with a targeted anti-avoidance rule that is a couple of sentences long. 

That won't stop the odd bespoke arrangements for new employees but it would stop the vast majority. If a government wanted to go further, they'd just put a cap on employer pension contributions to a money purchase arrangement, similar to what was done in the good old days.

It's trivial to stop sal sac, just remove the pensions exclusion in the 2017 changes. But how would you stop a reverse sal sac, like I mentioned earlier? Capping employer pension conts to the level of the most generous public sector DB scheme perhaps, but then you may as well keep sal sac as an option with the a cap. 

Pat38493

zagfles said:

[Deleted User] said:

warrenb said:

I think one way they could claw back some from SS is to make it subject to NI (which should have the cuts reversed that were given in the last government). The problem they have is if they withdraw SS completely, what is to stop employers saying your salary is now xyz and we will contribute 30% to your pension instead of our current rate (making it the same contribution as it is at present).

It's trivial from a legislative perspective to stop salary sacrifice.

There's already anti-avoidance legislation that deals with most non-pension salary sacrifice.  And it's pretty easy to stop any other funny business with a targeted anti-avoidance rule that is a couple of sentences long. 

That won't stop the odd bespoke arrangements for new employees but it would stop the vast majority. If a government wanted to go further, they'd just put a cap on employer pension contributions to a money purchase arrangement, similar to what was done in the good old days.

It's trivial to stop sal sac, just remove the pensions exclusion in the 2017 changes. But how would you stop a reverse sal sac, like I mentioned earlier? Capping employer pension conts to the level of the most generous public sector DB scheme perhaps, but then you may as well keep sal sac as an option with the a cap. 

I suppose if you were designing a system from scratch, you wouldn't make it so that employees can avoid NI on the way in, but also don't pay NI on the way out either.  

That said, you probably wouldn't have NI and Income tax separate in the first place!

zagfles

[Deleted User] said:

zagfles said:

[Deleted User] said:

warrenb said:

I think one way they could claw back some from SS is to make it subject to NI (which should have the cuts reversed that were given in the last government). The problem they have is if they withdraw SS completely, what is to stop employers saying your salary is now xyz and we will contribute 30% to your pension instead of our current rate (making it the same contribution as it is at present).

It's trivial from a legislative perspective to stop salary sacrifice.

There's already anti-avoidance legislation that deals with most non-pension salary sacrifice.  And it's pretty easy to stop any other funny business with a targeted anti-avoidance rule that is a couple of sentences long. 

That won't stop the odd bespoke arrangements for new employees but it would stop the vast majority. If a government wanted to go further, they'd just put a cap on employer pension contributions to a money purchase arrangement, similar to what was done in the good old days.

It's trivial to stop sal sac, just remove the pensions exclusion in the 2017 changes. But how would you stop a reverse sal sac, like I mentioned earlier? Capping employer pension conts to the level of the most generous public sector DB scheme perhaps, but then you may as well keep sal sac as an option with the a cap. 

There's already some anti-avoidance rules to, for example, deal with pre-employment arrangements, with 'arrangements' having a very wide meaning:

A benefit provided for an employee is provided under “optional remuneration arrangements” so far as it is provided under arrangements of type A or B (regardless of whether those arrangements are made before or after the beginning of the person's employment).

While that's pretty wide, the government could introduce a TAAR that prevents tax relief for doing dodgy things.  For example, something along the lines of:

(1) This subsection applies if remuneration is provided in pursuance of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions.

(2) Where sub-section (1) applies, any payments to a registered pension scheme shall count as employment income of the employee.   

There would then be an NIC rule that says if my sub-section (2) applies then that amount is treated as a payment of earnings to the earner.  The effect of this would be that PAYE/NIC would due, with no relief income tax relief on the money going into the scheme. 

Being pedantic, if I was instructing Parliamentary Counsel to draft the TAAR, I would also ask for a bit (a) setting out who is deemed to be the employer, (b) that the employer is deemed to make the payment for PAYE purposes, and (c) that it also applies to former and prospective employments.

It would be utterly ridiculous and unfair if a private sector employer wasn't able to provide a level of employer pension contribution similar to a public sector employer on the same basis, ie free of tax & NI.

What next, if my employer agrees I can go part time, does the "benefit" of the extra days off mean I get taxed on the salary I gave up in order to receive that "benefit", if one of my motivations was paying less tax and NI

barnstar2077

The fact that unless you buy a house your LISA money cannot be removed until 60 without penalty has always made me suspicious that the minimum age to access a pension may well be gradually increased to be 60 as well.

Does anyone know why 60 was chosen in the first place, instead of linking it to state pension age in some way, the way accessing private pensions are now? 

zagfles

[Deleted User] said:

zagfles said:

[Deleted User] said:

zagfles said:

[Deleted User] said:

warrenb said:

I think one way they could claw back some from SS is to make it subject to NI (which should have the cuts reversed that were given in the last government). The problem they have is if they withdraw SS completely, what is to stop employers saying your salary is now xyz and we will contribute 30% to your pension instead of our current rate (making it the same contribution as it is at present).

It's trivial from a legislative perspective to stop salary sacrifice.

There's already anti-avoidance legislation that deals with most non-pension salary sacrifice.  And it's pretty easy to stop any other funny business with a targeted anti-avoidance rule that is a couple of sentences long. 

That won't stop the odd bespoke arrangements for new employees but it would stop the vast majority. If a government wanted to go further, they'd just put a cap on employer pension contributions to a money purchase arrangement, similar to what was done in the good old days.

It's trivial to stop sal sac, just remove the pensions exclusion in the 2017 changes. But how would you stop a reverse sal sac, like I mentioned earlier? Capping employer pension conts to the level of the most generous public sector DB scheme perhaps, but then you may as well keep sal sac as an option with the a cap. 

There's already some anti-avoidance rules to, for example, deal with pre-employment arrangements, with 'arrangements' having a very wide meaning:

A benefit provided for an employee is provided under “optional remuneration arrangements” so far as it is provided under arrangements of type A or B (regardless of whether those arrangements are made before or after the beginning of the person's employment).

While that's pretty wide, the government could introduce a TAAR that prevents tax relief for doing dodgy things.  For example, something along the lines of:

(1) This subsection applies if remuneration is provided in pursuance of an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions.

(2) Where sub-section (1) applies, any payments to a registered pension scheme shall count as employment income of the employee.   

There would then be an NIC rule that says if my sub-section (2) applies then that amount is treated as a payment of earnings to the earner.  The effect of this would be that PAYE/NIC would due, with no relief income tax relief on the money going into the scheme. 

Being pedantic, if I was instructing Parliamentary Counsel to draft the TAAR, I would also ask for a bit (a) setting out who is deemed to be the employer, (b) that the employer is deemed to make the payment for PAYE purposes, and (c) that it also applies to former and prospective employments.

It would be utterly ridiculous and unfair if a private sector employer wasn't able to provide a level of employer pension contribution similar to a public sector employer on the same basis, ie free of tax & NI.

What next, if my employer agrees I can go part time, does the "benefit" of the extra days off mean I get taxed on the salary I gave up in order to receive that "benefit", if one of my motivations was paying less tax and NI

You are confusing things.  First, I am making up things as an example that only focuses on salary sacrifice for pension contributions.  Nothing else. 

Second, getting rid of salary sacrifice would apply to all types of pension (e.g. DC and DB). 

Third, my made up wording has nothing to do with the level of normal employer contributions. The employer could make 5% or 100%.  My made up rule just applies if you normally got 5% and to get, for example, the extra 95% you had to gave up a whopping proportion of your salary.

Time off for less pay (and hence less tax and less NIC) is not tax avoidance.

Your right I'm confusing two separate things. But if we take them one at a time:

Why is time off for less pay not tax avoidance in exactly the same way as pension conts for less pay? You agree with your employer that you get a benefit (eg extra days off, more pension conts) in exchange for a reduction in salary. The 2017 changes to sal sac specifically exempted both IIRC.

The other issue is "reverse sal sac". What if "normal employer contributions" was 30% of salary. Or 50%. And employees get the option to trade pension for pay, as happens now with company cars (people trading car for cash allowance). Would those who choose the standard default and don't opt in to anything be taxed on what they could have had had they chosen a particular level of pension conts? What level? 

What about a "one man band" limited company? Could that "employment contract" be 70% employer conts, so in the world of flat rate relief someone with such a company making £120k could put 70% of their pay into a pension with effectively full marginal relief? If the "employer" can make whatever conts they want as long as there no "optional" element? 

I think the only real fair and uncomplicated way to deal with employer conts in a flat rate relief world is to cap employer conts, and practically, that would have to be at the level of the most generous public sector scheme.  Plus the rules for valuing employer conts for DB would have to be simplified.