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

Andy_L

michaels said:

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.

But then the cs scheme has a higher accrual rate than NHS, 2.32% Vs 1.85.

Andy_L

michaels said:

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.

But then the cs scheme has a higher accrual rate than NHS, 2.32% Vs 1.85.

TheBanker

crv1963 said:

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!

Perhaps though if they didn't get the NI Savings they may not offer the 12% match and simply stick to the legal minimum? You get a larger pension pot, employer gets some cost saving, win, win?

Maybe, maybe not. My pension became a SalSac scheme about 9 years ago but the employer contribution did not change. It was positioned as a benefit to employees, which it is, especially those who pay 20% tax because they benefit from saving a higher rate of NI. A saving is still a saving though and I am not complaining - I realise their 12% contribution is much higher than it needs to be by law (for my company/industry that's a legacy of arrangements put in place when the final salary schemes closed).

TheBanker

MetaPhysical said:

Fixing the absurd tax traps inherent in the tax system will in itself address some of these issues discussed.  Many, myself included, shuttle more money than we'd ideally like to into our pensions to avoid the frankly disgusting 62% tax trap.  I'd actually rather like that money now to assist me doing my home up..  But the tax trap compels people to move it into pension rather than let the government have this money.

I agree - I also pay in more to my pension than I need to, to avoid the 60% tax trap. If this didn't exist (so the rate either continued at 40%, or even if the 45% band kicked in at £100k) I would probably contribute less. and therefore pay slightly more tax/NI overall. I'd also spend slightly more money in the economy today, which would help and also likely be subject to VAT. Fixing the 62% problem would look like a tax cut, but I suspect it would lead to net increase in tax revenue, 

TheBanker

MK62 said:

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.......

I think the 'fairest' thing would be to merge NI into Income Tax. Some will say that's unfair, given NI isn't currently paid by pensioners and under my proposal would be by some. But NI pays for a lot more than the state pension so it is 'fair' in my mind that pensioners who have the means should contribute. After all, they are the biggest users of NHS services.

The combined tax would need to have new thresholds and contribution rates. I may consider bringing back the 10p starting rate to support lower paid workers and some pensioners. I'd also look in detail at how savings income is taxed, to see if the current combination of ISA allowances, the £1000/£500 allowance and the Starting Rate are the most effecive way of taxing this income. 

This would be a huge change, would take years and cost hundreds of millions in implementation costs, and would be unpopular with some. Which is why it will not happen. But if it did I think it would be fairer overall, and simpler once we'd got over the transition. 

hugheskevi

Should be left alone

TheBanker said:

MetaPhysical said:

Fixing the absurd tax traps inherent in the tax system will in itself address some of these issues discussed.  Many, myself included, shuttle more money than we'd ideally like to into our pensions to avoid the frankly disgusting 62% tax trap.  I'd actually rather like that money now to assist me doing my home up..  But the tax trap compels people to move it into pension rather than let the government have this money.

I agree - I also pay in more to my pension than I need to, to avoid the 60% tax trap. If this didn't exist (so the rate either continued at 40%, or even if the 45% band kicked in at £100k) I would probably contribute less. and therefore pay slightly more tax/NI overall. I'd also spend slightly more money in the economy today, which would help and also likely be subject to VAT. Fixing the 62% problem would look like a tax cut, but I suspect it would lead to net increase in tax revenue, 

I think it is damaging in other ways too. In my case, I've had an income in the higher rate band since January 2003.

In practice, I have paid higher rate tax in 7 years since then, and even then a fairly low amount due to pension contributions. I think the highest taxable income I've taken is £61,500. I avoided paying higher rate through a combination of unpaid leave to go and travel for months or years at a time (to avoid higher rate tax in 2 or 3 years for each trip by spreading travel across 2 or 3 tax years by travelling for 6 or 18 months), or by high levels of pension contributions.

This was in conjunction with exploiting zero-cost borrowing on credit cards, along with not prioritising my mortgage, to have resources to enable high pension contributions to fully exploit higher rate relief, as the rewards of a pension for a higher rate taxpayer were too great and the political uncertainty around higher rate tax relief encourages contributions to be a priority whilst the good times last. There also used to a more meaningful dividend allowance to take income from, but that is not very attractive now, but I've used the allowance fully for the 7 years or so.

That led to having pension levels such that I'll be in danger of paying higher rate tax after age 55 just from pension income alone. I'm not very interested in working if out of every £1 I earn I will pay:

• 40p Income Tax
• 2p National Insurance
• 11.6p VAT
• Plus some amount toward fuel duties, air passenger duty, council tax, TV licences, Stamp Duty, insurance premium tax, vehicle excise duty, and alcohol duty (admittedly some double-counting with VAT in some of these)
• Then some of the money goes in tax, but indirectly, eg Corporation Tax of the company I buy goods and services from, income tax and national insurance of the staff serving me, business rates for the premises I buy the goods in, etc.
• The money may lead to tax on interest, tax on dividends, or capital gains tax.
• And whatever is left may well face Inheritance Tax

I'd prefer not to work given the amount of tax burden on any income in the higher rate band, so plan to retire next year at the age of 47, not least due to the pension accrued from age 55.

Granted this is a nice position to be in, but that is beside the point. I will respond rationally to incentives, and those incentives are pushing me toward excessive pension contributions, not working, and early retirement.

We have the nonsensical position where anyone aged 55+ who is a higher rate taxpayer now but a future basic rate taxpayer can put money into a pension and get a 42% (85/60) uplift for funds accessible whenever they choose, and more with salary sacrifice.

I think people significantly underestimate the harm caused by tax systems that encourage the wrong behaviour.

Andy_L

TheBanker said:

MK62 said:

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.......

I think the 'fairest' thing would be to merge NI into Income Tax. Some will say that's unfair, given NI isn't currently paid by pensioners and under my proposal would be by some. But NI pays for a lot more than the state pension so it is 'fair' in my mind that pensioners who have the means should contribute. After all, they are the biggest users of NHS services.

The combined tax would need to have new thresholds and contribution rates. I may consider bringing back the 10p starting rate to support lower paid workers and some pensioners. I'd also look in detail at how savings income is taxed, to see if the current combination of ISA allowances, the £1000/£500 allowance and the Starting Rate are the most effecive way of taxing this income. 

This would be a huge change, would take years and cost hundreds of millions in implementation costs, and would be unpopular with some. Which is why it will not happen. But if it did I think it would be fairer overall, and simpler once we'd got over the transition. 

most of the other things that NI pays for specifically exclude pensioners from claiming them though

LHW99

most of the other things that NI pays for specifically exclude pensioners from claiming them though

Which is to an extent beside the point - taxes generally pay for the whole range of benefits, which various population segments can't claim. Free child education isn't "claimed" by the childless, universal credit isn't claimed by those above a certain income level......

Andy_L

LHW99 said:

most of the other things that NI pays for specifically exclude pensioners from claiming them though

Which is to an extent beside the point - taxes generally pay for the whole range of benefits, which various population segments can't claim. Free child education isn't "claimed" by the childless, universal credit isn't claimed by those above a certain income level......

but NI is (uniquely?) a hypothocated tax unlike "taxes generally"

michaels

A lot of existing pension pots have already been subject to NI on the way on so you are proposing for many to charge NI on the same income twice.  For those who paid NI and saved basic rate tax on the way in, paying NI a second time and Basic rate on the way out would mean they had actually receive less from money that has gone through the pension than they would have got if they had simply taken it as income - so rather than a tax break for pension saving these lower income people would have suffered a tax penalty.