POLL - Should NI avoidance on pension contributions, via Salary Sacrifice, be stopped

MK62

Should be stopped

Attempting to limit employer contributions would be equally "daft" though......as it would give rise to many of the same "problems".
Flat rate relief is really another debate...... and I suppose it would depend on the specifics of it. On the face, it seems fairer, but perhaps involves even more winners and (especially) losers.......personally I can't see any change happening there UNLESS there's a saving to be made by government (which is entirely possible), so if it does happen, I'd expect it to be at the lower end of the speculation.....probably iro 25%.

zagfles

MK62 said:

Attempting to limit employer contributions would be equally "daft" though......as it would give rise to many of the same "problems".
Flat rate relief is really another debate...... and I suppose it would depend on the specifics of it. On the face, it seems fairer, but perhaps involves even more winners and (especially) losers.......personally I can't see any change happening there UNLESS there's a saving to be made by government (which is entirely possible), so if it does happen, I'd expect it to be at the lower end of the speculation.....probably iro 25%.

What problems would limiting employer conts to say the level of the most generous public sector DB scheme cause? Assuming a simpler formula for valuing them. 

Flat rate relief would make sal sac more equal to non sal sac for BR taxpayers and so reduce the "unfairness" of sal sac as an NI dodge. 

But that aside, banning sal sac just changes the groups who the "unfairness" is compared between. With sal sac, it's "not fair" that someone whose employer doesn't offer it gets less NI relief than someone whose employer does. With sal sac banned, it's "not fair" that someone whose employer has a generous DB scheme or high employer DC conts gets more remuneration NI free than someone with min AE employer conts. 

Grumpy_chap

michaels said:

I think current pension would be grandfathered (although not sure how that would work with a FS DB rather than a career average). 

Everything new would be taxed on the way in so your example with someone with already a large DB still works ok?

I guess if you have already reached the max TFLS you would gain under the new system.

Whatever rules there are have to work for DC and DB schemes.
DB schemes can be Final Salary or Career Average.
DB schemes can be funded or unfunded - even funded may require a future input from the employer if the funding is inadequate.

I don't think the "tax on the way in" work with DB schemes.

Someone already put upthread how the same accrual for two individuals on the same current salary has a different "input" value depending upon the individual's ages.

Even in the case of two 20 yo, both currently earning £30k, the value realised (benefit) of the "input" value varies depending on the career progression of the two individuals.  One might end their career on £40k and the other on £400k -the later realises more yield from this year's contribution whether FS or CA is in place.

If the scheme is inadequately funded, the employer needs to make a future contribution to the scheme to make up the shortfall.  The individuals earning DB outputs this year might not be employees in 20 years' time when the scheme requires shortfall to be funded.  How is that taxed?  Do the employees in 2044 suffer the tax that should have been borne by the employees of 2024?  Does the employer in 20 years' time have to set up payroll to collect the tax from the individuals that have left the business?

michaels

Grumpy_chap said:

michaels said:

I think current pension would be grandfathered (although not sure how that would work with a FS DB rather than a career average). 

Everything new would be taxed on the way in so your example with someone with already a large DB still works ok?

I guess if you have already reached the max TFLS you would gain under the new system.

Whatever rules there are have to work for DC and DB schemes.
DB schemes can be Final Salary or Career Average.
DB schemes can be funded or unfunded - even funded may require a future input from the employer if the funding is inadequate.

I don't think the "tax on the way in" work with DB schemes.

Someone already put upthread how the same accrual for two individuals on the same current salary has a different "input" value depending upon the individual's ages.

Even in the case of two 20 yo, both currently earning £30k, the value realised (benefit) of the "input" value varies depending on the career progression of the two individuals.  One might end their career on £40k and the other on £400k -the later realises more yield from this year's contribution whether FS or CA is in place.

If the scheme is inadequately funded, the employer needs to make a future contribution to the scheme to make up the shortfall.  The individuals earning DB outputs this year might not be employees in 20 years' time when the scheme requires shortfall to be funded.  How is that taxed?  Do the employees in 2044 suffer the tax that should have been borne by the employees of 2024?  Does the employer in 20 years' time have to set up payroll to collect the tax from the individuals that have left the business?

Career average doesn't actually mean career average, it actually means the benefit from each years entitlement relates to the salary in the year the entitlement is earned.

Every where I have worked in the private sector, pay packages were negotiated individually so the fact I accepted 50k plus a 25k pension contribution whereas a colleague might have agreed to 65k and a 10k pension contribution doesn't mean either of us partook of 'salary sacrifice' so without an agreed baseline employer contribution level (the minimum 3%?) how can any arrangement be deemed to be salary sacrifice?

hugheskevi

Should be left alone

michaels said:

Grumpy_chap said:

michaels said:

I think current pension would be grandfathered (although not sure how that would work with a FS DB rather than a career average). 

Everything new would be taxed on the way in so your example with someone with already a large DB still works ok?

I guess if you have already reached the max TFLS you would gain under the new system.

Whatever rules there are have to work for DC and DB schemes.
DB schemes can be Final Salary or Career Average.
DB schemes can be funded or unfunded - even funded may require a future input from the employer if the funding is inadequate.

I don't think the "tax on the way in" work with DB schemes.

Someone already put upthread how the same accrual for two individuals on the same current salary has a different "input" value depending upon the individual's ages.

Even in the case of two 20 yo, both currently earning £30k, the value realised (benefit) of the "input" value varies depending on the career progression of the two individuals.  One might end their career on £40k and the other on £400k -the later realises more yield from this year's contribution whether FS or CA is in place.

If the scheme is inadequately funded, the employer needs to make a future contribution to the scheme to make up the shortfall.  The individuals earning DB outputs this year might not be employees in 20 years' time when the scheme requires shortfall to be funded.  How is that taxed?  Do the employees in 2044 suffer the tax that should have been borne by the employees of 2024?  Does the employer in 20 years' time have to set up payroll to collect the tax from the individuals that have left the business?

Career average doesn't actually mean career average, it actually means the benefit from each years entitlement relates to the salary in the year the entitlement is earned.

Every where I have worked in the private sector, pay packages were negotiated individually so the fact I accepted 50k plus a 25k pension contribution whereas a colleague might have agreed to 65k and a 10k pension contribution doesn't mean either of us partook of 'salary sacrifice' so without an agreed baseline employer contribution level (the minimum 3%?) how can any arrangement be deemed to be salary sacrifice?

Even career average schemes retain a strong element of future career in their valuation - if someone works in the NHS aged 20, then the value of the pension they end up with is far lower if they leave the NHS aged 22 and just get CPI revaluation compared to working in the NHS until age 68, picking up revaluation each year of CPI+1.5%. The difference is even starker in the uniformed service, where in addition to the enhanced in-service revaluation they also lose NPA 60 (which reverts to SPA for deferred members).

Capping employer rate at highest public sector rate would mean a cap of 43.8% (Armed Forces rate).That would solve a lot of design issues, but would bring in hardly any revenue, I don't know the stats, but I doubt many have a pension contribution rate of 43.8%+ of salary and are not already constrained by minimum wage or Annual Allowance (including taper)

zagfles

hugheskevi said:

michaels said:

Grumpy_chap said:

michaels said:

I think current pension would be grandfathered (although not sure how that would work with a FS DB rather than a career average). 

Everything new would be taxed on the way in so your example with someone with already a large DB still works ok?

I guess if you have already reached the max TFLS you would gain under the new system.

Whatever rules there are have to work for DC and DB schemes.
DB schemes can be Final Salary or Career Average.
DB schemes can be funded or unfunded - even funded may require a future input from the employer if the funding is inadequate.

I don't think the "tax on the way in" work with DB schemes.

Someone already put upthread how the same accrual for two individuals on the same current salary has a different "input" value depending upon the individual's ages.

Even in the case of two 20 yo, both currently earning £30k, the value realised (benefit) of the "input" value varies depending on the career progression of the two individuals.  One might end their career on £40k and the other on £400k -the later realises more yield from this year's contribution whether FS or CA is in place.

If the scheme is inadequately funded, the employer needs to make a future contribution to the scheme to make up the shortfall.  The individuals earning DB outputs this year might not be employees in 20 years' time when the scheme requires shortfall to be funded.  How is that taxed?  Do the employees in 2044 suffer the tax that should have been borne by the employees of 2024?  Does the employer in 20 years' time have to set up payroll to collect the tax from the individuals that have left the business?

Career average doesn't actually mean career average, it actually means the benefit from each years entitlement relates to the salary in the year the entitlement is earned.

Every where I have worked in the private sector, pay packages were negotiated individually so the fact I accepted 50k plus a 25k pension contribution whereas a colleague might have agreed to 65k and a 10k pension contribution doesn't mean either of us partook of 'salary sacrifice' so without an agreed baseline employer contribution level (the minimum 3%?) how can any arrangement be deemed to be salary sacrifice?

Even career average schemes retain a strong element of future career in their valuation - if someone works in the NHS aged 20, then the value of the pension they end up with is far lower if they leave the NHS aged 22 and just get CPI revaluation compared to working in the NHS until age 68, picking up revaluation each year of CPI+1.5%. The difference is even starker in the uniformed service, where in addition to the enhanced in-service revaluation they also lose NPA 60 (which reverts to SPA for deferred members).

Capping employer rate at highest public sector rate would mean a cap of 43.8% (Armed Forces rate).That would solve a lot of design issues, but would bring in hardly any revenue, I don't know the stats, but I doubt many have a pension contribution rate of 43.8%+ of salary and are not already constrained by minimum wage or Annual Allowance (including taper)

A cap on employer's conts of 43.8% salary would mean that the max sal sac for someone in a DC scheme with 10% base employer conts would be 23.5%. So someone on £80k would only be able to sal sac £18800. Not even enough to take them out of higher rate tax, and they'd only get 2% NI relief. And the limit could apply on a pay period basis, so stopping the lumpy contributions loophole to maximise NI savings. 

michaels

hugheskevi said:

michaels said:

Grumpy_chap said:

michaels said:

I think current pension would be grandfathered (although not sure how that would work with a FS DB rather than a career average). 

Everything new would be taxed on the way in so your example with someone with already a large DB still works ok?

I guess if you have already reached the max TFLS you would gain under the new system.

Whatever rules there are have to work for DC and DB schemes.
DB schemes can be Final Salary or Career Average.
DB schemes can be funded or unfunded - even funded may require a future input from the employer if the funding is inadequate.

I don't think the "tax on the way in" work with DB schemes.

Someone already put upthread how the same accrual for two individuals on the same current salary has a different "input" value depending upon the individual's ages.

Even in the case of two 20 yo, both currently earning £30k, the value realised (benefit) of the "input" value varies depending on the career progression of the two individuals.  One might end their career on £40k and the other on £400k -the later realises more yield from this year's contribution whether FS or CA is in place.

If the scheme is inadequately funded, the employer needs to make a future contribution to the scheme to make up the shortfall.  The individuals earning DB outputs this year might not be employees in 20 years' time when the scheme requires shortfall to be funded.  How is that taxed?  Do the employees in 2044 suffer the tax that should have been borne by the employees of 2024?  Does the employer in 20 years' time have to set up payroll to collect the tax from the individuals that have left the business?

Career average doesn't actually mean career average, it actually means the benefit from each years entitlement relates to the salary in the year the entitlement is earned.

Every where I have worked in the private sector, pay packages were negotiated individually so the fact I accepted 50k plus a 25k pension contribution whereas a colleague might have agreed to 65k and a 10k pension contribution doesn't mean either of us partook of 'salary sacrifice' so without an agreed baseline employer contribution level (the minimum 3%?) how can any arrangement be deemed to be salary sacrifice?

Even career average schemes retain a strong element of future career in their valuation - if someone works in the NHS aged 20, then the value of the pension they end up with is far lower if they leave the NHS aged 22 and just get CPI revaluation compared to working in the NHS until age 68, picking up revaluation each year of CPI+1.5%. The difference is even starker in the uniformed service, where in addition to the enhanced in-service revaluation they also lose NPA 60 (which reverts to SPA for deferred members).

Capping employer rate at highest public sector rate would mean a cap of 43.8% (Armed Forces rate).That would solve a lot of design issues, but would bring in hardly any revenue, I don't know the stats, but I doubt many have a pension contribution rate of 43.8%+ of salary and are not already constrained by minimum wage or Annual Allowance (including taper)

Interesting, I only get CPI regardless of whether still in the cs or deferred and scheme pension age is spa, didn't realise other schemes had such different rules.

TheBanker

crv1963 said:

My answer is no, leave it as it is. I say that as someone who does not benefit from SS on my NI contributions. However the Govt would be better off leaving things as they are until they complete their pension review, and then seek cross party agreement on pension reforms.

The Govt want to encourage pension saving, endless tinkering with pensions has led to a distrust of them and although most of the money lost by the Govt through SS may go to HR Taxpayers, this is possibly because LR taxpayers have less disposable income and more pressing day to day expenditure to do?

I don't think the bit in bold is correct. I am a HR taxpayer so the NI saving through salary sacrifice is only 2%. For a BR taxpayer it would be 8%. The money 'lost' is actually going to my employer who is saving 13.8% employer's NI (I think), which they don't share with me. Which in turn makes their 12% matched contribution look rather less generous!

Hoenir

TheBanker said:

crv1963 said:

My answer is no, leave it as it is. I say that as someone who does not benefit from SS on my NI contributions. However the Govt would be better off leaving things as they are until they complete their pension review, and then seek cross party agreement on pension reforms.

The Govt want to encourage pension saving, endless tinkering with pensions has led to a distrust of them and although most of the money lost by the Govt through SS may go to HR Taxpayers, this is possibly because LR taxpayers have less disposable income and more pressing day to day expenditure to do?

I don't think the bit in bold is correct. I am a HR taxpayer so the NI saving through salary sacrifice is only 2%. For a BR taxpayer it would be 8%. The money 'lost' is actually going to my employer who is saving 13.8% employer's NI (I think), which they don't share with me. Which in turn makes their 12% matched contribution look rather less generous!

Your employer bears the administration cost of operating the scheme for it's employees. Time costs money. One reason many smaller organisations shy away from offering it. Particularly if payroll services are outsourced. 

MK62

Should be stopped

zagfles said:

MK62 said:

Attempting to limit employer contributions would be equally "daft" though......as it would give rise to many of the same "problems".
Flat rate relief is really another debate...... and I suppose it would depend on the specifics of it. On the face, it seems fairer, but perhaps involves even more winners and (especially) losers.......personally I can't see any change happening there UNLESS there's a saving to be made by government (which is entirely possible), so if it does happen, I'd expect it to be at the lower end of the speculation.....probably iro 25%.

What problems would limiting employer conts to say the level of the most generous public sector DB scheme cause? Assuming a simpler formula for valuing them. 

Flat rate relief would make sal sac more equal to non sal sac for BR taxpayers and so reduce the "unfairness" of sal sac as an NI dodge. 

But that aside, banning sal sac just changes the groups who the "unfairness" is compared between. With sal sac, it's "not fair" that someone whose employer doesn't offer it gets less NI relief than someone whose employer does. With sal sac banned, it's "not fair" that someone whose employer has a generous DB scheme or high employer DC conts gets more remuneration NI free than someone with min AE employer conts. 

Well, firstly, limiting employer contributions to the most generous public sector DB scheme would raise little extra revenue for the govt .......and, more importantly for this debate, would do little to really redress the issue of salsac unfairness, since it would affect relatively few currently using salsac pension contribution arrangements.
Secondly, the "employer contribution rate" of those DB schemes changes whenever the discount rate changes....it's not fixed......

As for the fairness issues......you might be right.......but you can't fix everything, and you certainly can't fix everything all at once......that's not really a reason for doing nothing though (assuming you believe the current system is fundamentally unfair)....all you can do is reduce the "unfairness" where you can, and that might mean having to do it gradually too.......
As stated earlier, the "fairest" thing here would probably be to make all pension contributions free of NI.....but that is hardly likely at this time, given the current state of public finances and the limited options the government has left itself here.........so, IF govt wanted to act on salary sacrifice for pension contributions, it would really have to look at alternative courses of action (and the main motive would probably be revenue raising rather than any fairness issues)

As an aside though, it's interesting to see what different opinions people have as to what is fair.......or fairest......reinforces that old saying about not being able to please all the people.......