October Budget - Pension Tax Relief vs Salary Sacrifice

doodling

Hi,

[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.

Unfortunately your wording cannot work because the main reason for contributing anything to a recognised pension scheme is tax avoidance.  That is why such schemes exist - the government has deliberately offered people the opportunity to avoid paying tax if they save for their retirement.

What you are trying to differentiate between is an arrangement where an employee can choose how much tax to avoid and one where they can not.  That seems like a disincentive for people to pay additional money into their pensions - e.g. "well, you were paying 2% but if you up your contribution to 3% you will still be taxed as if you re paying 2%".

I think that approach is doomed to fail.  Are you also going to tax people on the basis of their previous job's pension contribution rate if they move to a new job - that could also fall under your definition.

GazzaBloom

If they need money today to fill the “22 Billion Black Hole” (has Two Tier registered that as a trademark yet?), it may be easier to simply renege on their promise to nor increase tax, NI or VAT. If you need more money…collect more across the board.

doodling

Hi,

[Deleted User] said:

doodling said:

Hi,

Unfortunately your wording cannot work because the main reason for contributing anything to a recognised pension scheme is tax avoidance.  

Er, no.  Contributing to a pension is not tax avoidance.  Have a read of this: https://taxpolicy.org.uk/2024/01/22/avoidancefaq/

And, from that article:

So here are some things that are not tax avoidance, even though (in the usual meaning of the term) you are “avoiding” tax:

• Investing through a pension or ISA. Yes, it avoids tax, but that was absolutely intended by Parliament. Not tax avoidance. Anyone who says otherwise is very silly. A small amount of cognitive dissonance is required to say that an ISA avoids tax but isn’t tax avoidance, but it’s nothing I can’t handle.

It appears that your argument relies on perverting the meaning of the English language, as the article acknowledges.  That is not a helpful basis for debate.

Unfortunately the link to "very silly" no longer works - perhaps the authors had difficulty maintaining that stance?  Alternatively, perhaps it is "very silly" due to the primary legislation around pensions and changing that would require that Parliament fundamentally redefine what pensions are.  You'd need more than a tax avoidance rule to fix that.

And:

So you can’t realistically define tax avoidance in a legally robust way – and that’s why, as far as I’m aware, no country has managed to do so successfully.

Your move....

MetaPhysical

GazzaBloom said:

If they need money today to fill the “22 Billion Black Hole” (has Two Tier registered that as a trademark yet?), it may be easier to simply renege on their promise to nor increase tax, NI or VAT. If you need more money…collect more across the board.

I agree.  Rather that fully mess up and wreck pensions with a large number of unknown unknowns causing serious workforce unintended consequences, why not just add 3p to the rate of income tax and be done with it as the IFS discussed? 

MeteredOut

MetaPhysical said:

GazzaBloom said:

If they need money today to fill the “22 Billion Black Hole” (has Two Tier registered that as a trademark yet?), it may be easier to simply renege on their promise to nor increase tax, NI or VAT. If you need more money…collect more across the board.

I agree.  Rather that fully mess up and wreck pensions with a large number of unknown unknowns causing serious workforce unintended consequences, why not just add 3p to the rate of income tax and be done with it as the IFS discussed? 

Because politics.

MetaPhysical

MeteredOut said:

MetaPhysical said:

GazzaBloom said:

If they need money today to fill the “22 Billion Black Hole” (has Two Tier registered that as a trademark yet?), it may be easier to simply renege on their promise to nor increase tax, NI or VAT. If you need more money…collect more across the board.

I agree.  Rather that fully mess up and wreck pensions with a large number of unknown unknowns causing serious workforce unintended consequences, why not just add 3p to the rate of income tax and be done with it as the IFS discussed? 

Because politics.

Indeed.  That's the reason.  And we are all partly responsible.  Because any political party implying raises in basic rate tax gets hammered at the election.  It's about time we got real and had a more grown up debate in this country.  I am not being political by the way.  It's a statement of fact.  I think the UK populace needs to understand that in order to have the oft-quoted European levels of public services then we need to pay more for them.  And "we" is the average Joe/Joanne as well, not just those who are "rich" with a salary of £50k and over.  Everyone always seems to think that someone else should pay the taxes, never themselves.

booneruk

[Deleted User] said:

doodling said:

Hi,

Unfortunately your wording cannot work because the main reason for contributing anything to a recognised pension scheme is tax avoidance.  

Er, no.  Contributing to a pension is not tax avoidance.  Have a read of this: https://taxpolicy.org.uk/2024/01/22/avoidancefaq/

"So here are some things that are not tax avoidance, even though you are “avoiding” tax" 

It seems there's some subjective/personal interpretation of this classification. Is there an ultimate authority that decides? To me, evasion = illegally not paying tax that is due. Avoidance = avoiding tax, simple as that, though legal (getting married, dying with an estate, pensions, ISAs, Salary sacrifice). 'Aggressive' avoidance = bending the rules to avoid tax in a way that's likely to upset people, but technically not illegal.

zagfles

[Deleted User] said:

zagfles said:

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?  

Have a look at this about what tax avoidance is: https://taxpolicy.org.uk/2024/01/22/avoidancefaq/

If you just look at exiting rules (i.e. nothing made up about what may or may not happen to salary sacrifice) then paying money to a pension scheme to get tax relief is not tax avoidance.  It would become tax avoidance if you claimed the tax relief but tried to get around the pension scheme rules (e.g. by making a contribution, getting the pension to invest in something with a 14 day money back period, buying that from the pension scheme on deferred payment terms and then redeeming the investment).

zagfles said:

The 2017 changes to sal sac specifically exempted both IIRC.

There is an exemption for pensions but the legislation does not say anything about time off for less pay.

zagfles said:

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?  

You can make up whatever rules you want here.  It's up to you.  The government hasn't said that they will do anything like this and so you are free to decide.  If you can describe what you think an appropriate rule could be, it can be legislated for. 

If a governments were to want to prevent less NIC being paid on salary sacrifice arrangements, it would make sense to do it for all things that are economically the same.

zagfles said:

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? 

Again, your choice.  Make up whatever rules you want.  

zagfles said:

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. 

Great.  But a flat rate relief system has nothing to do with getting rid of salary sacrifice. A government can do neither, can do one or the other, or both.

Flat rate relief is everything to do with it, that surely is the reason we're discussing it!  Rather than some theoretical discussion on what it'd be possible for a govt to do and the legislation wording to achieve it - I'm sure the govt could legislate that everyone must wear green socks on a full moon if it wanted!

The point is that in a flat rate relief world, a blatantly obvious loophole to get full marginal relief is sal sac. That would have to be closed or limited, or employer conts would have to become a taxable benefit. 

Employer conts becoming a taxable benefit is a non starter. That would cause all sorts of problems with NHS doctors etc like the AA and LTA did. 

Banning sal sac completely for pensions would be hugely discriminatory, as above someone in a min AE scheme could only get full marginal tax/NI relief on a small amount of their total remuneration whereas someone with a gold plated public sector pension would get it on a much larger part. Tax relief available would be dependent on your employment contract, something which is not the case now (only NI relief). 

So the easiest and fairest way would be to cap employer pension conts, and a sensible level would be the level of the most generous public sector scheme. Perhaps 40% of salary. Plus the rules for valuing DB pension conts would have to be simplified, perhaps basing it on scheme rules rather than assessing individually like for the AA. So eg a 1/49th CARE scheme like the LGPS with a 5.5% employee cont could be valued at 16/49 (similar to the AA calc) -5.5% = about 27%

No changes to sal sac rules are needed. Employees will be allowed to sal sac to create the max employer cont, so eg someone in a DC scheme with 10% employer base conts would be allowed to sal sac up to 21% of salary, someone with a DB scheme valued at 27% employer conts would be allowed to sal sac about 9%, to create the max 40% employer conts. (formula is (40%-er)/1.4 where er is employer base conts, but employees could just be told the max sal sac % based on their scheme). 

Net pay pension deductions would be stopped and become RAS, so eg with flat rate of 25% relief, instead of 5% employee conts taken by net pay, 3.75% is taken by RAS and 1.25% is claimed by the scheme from HMRC. Saving basic rate taxpayers and costing higher rate. Similarly personal pension conts would remain RAS with a higher tax relief claimed but no additional tax relief available for higher rate taxpayers. 

It would also make sal sac less of an advantage over RAS for basic rate taxpayers, as sal sac would give 28% tax/NI relief compared to 25% RAS, instead of 28% compared to 20% now. Or if the flat rate was 30%, RAS would be better than sal sac!

There would be no need for the AA, or the LTA. Paying higher rate tax on pension income would act in a similar way, as you'd be penalised by paying tax at a higher rate than the tax relief you got. It'd be non sensical to deliberately build a pension big enough to put you into higher rate tax in retirement. 

zagfles

booneruk said:

[Deleted User] said:

doodling said:

Hi,

Unfortunately your wording cannot work because the main reason for contributing anything to a recognised pension scheme is tax avoidance.  

Er, no.  Contributing to a pension is not tax avoidance.  Have a read of this: https://taxpolicy.org.uk/2024/01/22/avoidancefaq/

"So here are some things that are not tax avoidance, even though you are “avoiding” tax" 

It seems there's some subjective/personal interpretation of this classification. Is there an ultimate authority that decides? To me, evasion = illegally not paying tax that is due. Avoidance = avoiding tax, simple as that, though legal (getting married, dying with an estate, pensions, ISAs, Salary sacrifice). 'Aggressive' avoidance = bending the rules to avoid tax in a way that's likely to upset people, but technically not illegal.

Judges, when it comes down to it. There is some incredibly woolly legislation, like human rights legislation, also stuff like sex discrimination act, where judges interpret the wording in all kinds of subjective ways and set precendents. 

Pat38493

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 have mentioned this point about unfairness between DB and DC schemes a few times.

If you reframe it in a different way, you could argue - the historical reason we have a differentiation between employer and employee contributions to pensions, is because in the past, employers bore some of the risk of delivering a decent result from the pension savings.  Therefore, we should move to a system where all contributions are routed through the employee somehow or other, and employers or companies should only be able to contribute (either with real money or notionally), if they are also bearing a portion of risk commensurate with the amount they contribute.  (obviously this would end up creating a totally different approach with all sorts of other rules being needed, but it might curtail high earners or extreme high net worth individuals from using the pension too much).