October Budget - Pension Tax Relief vs Salary Sacrifice

Albermarle

zagfles said:

[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. 

Unless of course you were using the pension as a tax friendly way of passing on an inheritance ( under current rules which maybe something else that changes of course) .

Linton

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.

But salary sacrifice is simply the employer paying more in employer's pension contribution.

Are you advocating that employees should pay higher rate tax on all their employers pension contributions?  If not how do distinguish between what is SS and what is standard?

hugheskevi

The statistics on the cost of pension tax and National Insurance reliefs are at this link.

A few key points from the stats:

• Total cost of income tax relief in 2022/23 was £46.8bn
• Lost National Insurance contributions due to use of salary sacrifice in 2022/23 was £3.9bn
• Total cost of income tax and National Insurance relief on pension contributions was £70.6bn in 2022/23
• The distribution of income tax relief was 33% at basic rate, 58% at higher rate and 9% at additional rate.
• Member salary sacrificed contributions into a public sector occupational scheme accounted for 8% of the cost of National Insurance relief, but total savings on National Insurance savings arising from contributions to a public sector occupational scheme (both employee and employer savings) were 36% of the total cost of National Insurance relief. 

A couple of observations:

• Some of the cost will be reduced by future tax received on pension payments. However, for a Chancellor wanting money now, that is of little relevance.
• HMRC statistics on pension salary sacrifice are dramatically improved to what they were 5 years ago - there has clearly been significant effort made to collate data in this area

westv

[Deleted User] said:

hugheskevi said:

The statistics on the cost of pension tax and National Insurance reliefs are at this link.

A few key points from the stats:

• ...
• Lost National Insurance contributions due to use of salary sacrifice in 2022/23 was £3.9bn
• ...

Wow!  That really has snowballed over the last 23 years.

How much of that is due to wage inflation.

id311299

I've been thinking about the "flat 30%" option for some time, and it doesn't make sense to me. I just don't see how it can be implemented in practice.

My understanding is that "Flat 30%" means that regardless of you income, you get 30% tax relief - you put in £1, and £1.43 appears in your pension pot, and this is the end of it. If my understanding is wrong, please someone explain.

If the above is correct, I see a couple of problems:

• For someone who is only paying basic rate tax, for every £1 they pay into their pension, additional £0.18 must come from somewhere? Where is this top-up coming from, and when?
• There is no guarantee that the additional revenue collected by the Treasury from penalizing contributions above the higher rate threshold will fully offset the topping up required in the first point. Even if current calculations show that the Treasury will be better off, that may not be the case when people, especially those earning a little above £50k, adjust their contributions to benefit as much as possible from the said top-up. Effectively there will be yet another group of people with big incentive to shovel more money into their pension - the "little above £50k" group, and this time the Treasury isn't just not collecting tax from them, it is paying already collected tax back to that group.

Please help me wrap my head around this if I misunderstand something.

I really can't see what the Chancellor can do with pensions under the current system that will guarantee the desired effect. Any changes that make people squirrel money away from the tax system or not earn the money in the first place will result in less revenue, not more. On the other hand, enticing people to use their existing pots may increase VAT receipts etc., but that's not the Labour way, is it. 

westv

[Deleted User] said:

westv said:

[Deleted User] said:

hugheskevi said:

The statistics on the cost of pension tax and National Insurance reliefs are at this link.

A few key points from the stats:

• ...
• Lost National Insurance contributions due to use of salary sacrifice in 2022/23 was £3.9bn
• ...

Wow!  That really has snowballed over the last 23 years.

How much of that is due to wage inflation.

24 years ago there was some bonus sacrifice, some informal arrangements for the odd airline pilots, etc but no all-employee salary sacrifice. 

It can't have been much later though. I remember sal sac being introduced at a previous employer and I'm guessing it was sometime between 2003 and 2006.

Dazed_and_C0nfused

For someone who is only paying basic rate tax, for every £1 they pay into their pension, additional £0.18 must come from somewhere? Where is this top-up coming from, and when?

That bit is easy for RAS contributions.

The providers just need to update their systems so they add the correct basic rate tax relief.  The providers claim to HMRC each month would be increased to reflect this.

The more complicated aspects are sorting net pay and salary sacrifice.

zagfles

Dazed_and_C0nfused said:

For someone who is only paying basic rate tax, for every £1 they pay into their pension, additional £0.18 must come from somewhere? Where is this top-up coming from, and when?

That bit is easy for RAS contributions.

The providers just need to update their systems so they add the correct basic rate tax relief.  The providers claim to HMRC each month would be increased to reflect this.

The more complicated aspects are sorting net pay and salary sacrifice.

Net pay - replaced by RAS. Sal sac - limited or banned. 

zagfles

Albermarle said:

zagfles said:

[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. 

Unless of course you were using the pension as a tax friendly way of passing on an inheritance ( under current rules which maybe something else that changes of course) .

Something which is also likely to change

Albermarle

The thread has been interesting and informative so far, but if 'political comments' creep in it will inevitably get closed, due to the forum rules.
eg

If they need money today to fill the “22 Billion Black Hole” (has Two Tier registered that as a trademark yet?), 

On the other hand, enticing people to use their existing pots may increase VAT receipts etc., but that's not the Labour way, is it.