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

michaels

zagfles said:

michaels said:

zagfles said:

michaels said:

Grumpy_chap said:

michaels said:

I think we should just have a flat rate uplift applied to money put aside for pension age rather than the myriad rules so everyone gets the same benefit.

So basically money goes into the pension fund after tax and NI is deducted and then gets a percentage added on and is available for withdrawal at pension age tax free.

What percentage uplift do people think would need to be offered to have to wait until pension age?  I would do it for 6.25% which is the uplift those who pay basic rate on the way in and the way out get.  Others who currently use sal sac, get employer NI added on and pay lower tax rates when retired compared to when earning obviously currently benefit much more from the pension perk than lower earners. 

No doubt lots will try to defend this very regressive tax break but I can't really see the basis for doing so.

I am not defending the tax break, but I think the idea you mention only works for personal / employee contributions to DC schemes.

For employer contributions to DC schemes, that "tax break" might actually end up incurring a higher tax bill than not having the pension contribution.

I can't work out how the flat uplift suggested would work in the case of DB schemes, for either the employer or the employee contribution.

My thinking is that effectively we 'do away with' the concept of employer contributions, simply add that amount to salaries, tax and NI it and then pay it into the pension and apply the uplift.

For DB there is a nominal sum calculated as being the value of the contribution, for example for the civil service alpha scheme this is made up of an employee and employee contribution, again the govt uplift could be applied to this leading to a 6.25% higher DB entitlement being earned.

Then you'll be back to all the pension problems affecting the NHS. Take a doctor on £100k. DB value maybe £30k a year, so they'll be taxed/NI'ed on an extra £30,000, mostly at 62%, an extra nearly £18k in tax. Do you think it'd persuade some to retire early? 

Perhaps, but then perhaps we would need to reduce marginal tax rates to make up.  Still seems fairer to me than making pension saving hugely more lucrative (and thus hugely more costly to the taxpayer) for those who earn more - ie regressive taxation.

Reducing marginal rates would surely negate the point of some sort of flat rate relief system. 

As I mentioned in the other thread, flat rate relief makes sense but I think you'd still need to allow limited employer conts with no taxable benefit. Otherwise it gets too complicated and will cause problems in the NHS etc. And it would make sal sac more equal with non sal sac for BR taxpayers. 

I think it gets too difficult because the big winners of the current system would become obvious if we had to compensate them for the loss of moving to a flat relief system but there is no complexity.  All remuneration is treated the same, all pension contributions get the same percentage benefit.

zagfles

michaels said:

zagfles said:

michaels said:

zagfles said:

michaels said:

Grumpy_chap said:

michaels said:

I think we should just have a flat rate uplift applied to money put aside for pension age rather than the myriad rules so everyone gets the same benefit.

So basically money goes into the pension fund after tax and NI is deducted and then gets a percentage added on and is available for withdrawal at pension age tax free.

What percentage uplift do people think would need to be offered to have to wait until pension age?  I would do it for 6.25% which is the uplift those who pay basic rate on the way in and the way out get.  Others who currently use sal sac, get employer NI added on and pay lower tax rates when retired compared to when earning obviously currently benefit much more from the pension perk than lower earners. 

No doubt lots will try to defend this very regressive tax break but I can't really see the basis for doing so.

I am not defending the tax break, but I think the idea you mention only works for personal / employee contributions to DC schemes.

For employer contributions to DC schemes, that "tax break" might actually end up incurring a higher tax bill than not having the pension contribution.

I can't work out how the flat uplift suggested would work in the case of DB schemes, for either the employer or the employee contribution.

My thinking is that effectively we 'do away with' the concept of employer contributions, simply add that amount to salaries, tax and NI it and then pay it into the pension and apply the uplift.

For DB there is a nominal sum calculated as being the value of the contribution, for example for the civil service alpha scheme this is made up of an employee and employee contribution, again the govt uplift could be applied to this leading to a 6.25% higher DB entitlement being earned.

Then you'll be back to all the pension problems affecting the NHS. Take a doctor on £100k. DB value maybe £30k a year, so they'll be taxed/NI'ed on an extra £30,000, mostly at 62%, an extra nearly £18k in tax. Do you think it'd persuade some to retire early? 

Perhaps, but then perhaps we would need to reduce marginal tax rates to make up.  Still seems fairer to me than making pension saving hugely more lucrative (and thus hugely more costly to the taxpayer) for those who earn more - ie regressive taxation.

Reducing marginal rates would surely negate the point of some sort of flat rate relief system. 

As I mentioned in the other thread, flat rate relief makes sense but I think you'd still need to allow limited employer conts with no taxable benefit. Otherwise it gets too complicated and will cause problems in the NHS etc. And it would make sal sac more equal with non sal sac for BR taxpayers. 

I think it gets too difficult because the big winners of the current system would become obvious if we had to compensate them for the loss of moving to a flat relief system but there is no complexity.  All remuneration is treated the same, all pension contributions get the same percentage benefit.

You seem to be talking about going from an EET system to a TEE system with a topup (like a LISA). Fine if you're starting from scratch. But how would that work in transition? Someone with a DB scheme would presumably get accrual to date as taxable income when they draw it, but future accrual would be paid tax free when drawn? So they'd get a DB pension partly taxed and partly tax free?

So someone who's already accrued a £50k pa pension total (inc state) would be able to accrue further pension from taxed income but not have to pay higher rate tax when drawing it? How would that address supposed unfairness? 

Going to a TEE system for everyone would be ridiculously complicated in transition particularly for DB, and there'd be all sorts of anomalies. Which is why LISAs are limited at a low level and not available to over 40's. 

michaels

zagfles said:

michaels said:

zagfles said:

michaels said:

zagfles said:

michaels said:

Grumpy_chap said:

michaels said:

I think we should just have a flat rate uplift applied to money put aside for pension age rather than the myriad rules so everyone gets the same benefit.

So basically money goes into the pension fund after tax and NI is deducted and then gets a percentage added on and is available for withdrawal at pension age tax free.

What percentage uplift do people think would need to be offered to have to wait until pension age?  I would do it for 6.25% which is the uplift those who pay basic rate on the way in and the way out get.  Others who currently use sal sac, get employer NI added on and pay lower tax rates when retired compared to when earning obviously currently benefit much more from the pension perk than lower earners. 

No doubt lots will try to defend this very regressive tax break but I can't really see the basis for doing so.

I am not defending the tax break, but I think the idea you mention only works for personal / employee contributions to DC schemes.

For employer contributions to DC schemes, that "tax break" might actually end up incurring a higher tax bill than not having the pension contribution.

I can't work out how the flat uplift suggested would work in the case of DB schemes, for either the employer or the employee contribution.

My thinking is that effectively we 'do away with' the concept of employer contributions, simply add that amount to salaries, tax and NI it and then pay it into the pension and apply the uplift.

For DB there is a nominal sum calculated as being the value of the contribution, for example for the civil service alpha scheme this is made up of an employee and employee contribution, again the govt uplift could be applied to this leading to a 6.25% higher DB entitlement being earned.

Then you'll be back to all the pension problems affecting the NHS. Take a doctor on £100k. DB value maybe £30k a year, so they'll be taxed/NI'ed on an extra £30,000, mostly at 62%, an extra nearly £18k in tax. Do you think it'd persuade some to retire early? 

Perhaps, but then perhaps we would need to reduce marginal tax rates to make up.  Still seems fairer to me than making pension saving hugely more lucrative (and thus hugely more costly to the taxpayer) for those who earn more - ie regressive taxation.

Reducing marginal rates would surely negate the point of some sort of flat rate relief system. 

As I mentioned in the other thread, flat rate relief makes sense but I think you'd still need to allow limited employer conts with no taxable benefit. Otherwise it gets too complicated and will cause problems in the NHS etc. And it would make sal sac more equal with non sal sac for BR taxpayers. 

I think it gets too difficult because the big winners of the current system would become obvious if we had to compensate them for the loss of moving to a flat relief system but there is no complexity.  All remuneration is treated the same, all pension contributions get the same percentage benefit.

You seem to be talking about going from an EET system to a TEE system with a topup (like a LISA). Fine if you're starting from scratch. But how would that work in transition? Someone with a DB scheme would presumably get accrual to date as taxable income when they draw it, but future accrual would be paid tax free when drawn? So they'd get a DB pension partly taxed and partly tax free?

So someone who's already accrued a £50k pa pension total (inc state) would be able to accrue further pension from taxed income but not have to pay higher rate tax when drawing it? How would that address supposed unfairness? 

Going to a TEE system for everyone would be ridiculously complicated in transition particularly for DB, and there'd be all sorts of anomalies. Which is why LISAs are limited at a low level and not available to over 40's. 

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.

zagfles

michaels said:

zagfles said:

michaels said:

zagfles said:

michaels said:

zagfles said:

michaels said:

Grumpy_chap said:

michaels said:

I think we should just have a flat rate uplift applied to money put aside for pension age rather than the myriad rules so everyone gets the same benefit.

So basically money goes into the pension fund after tax and NI is deducted and then gets a percentage added on and is available for withdrawal at pension age tax free.

What percentage uplift do people think would need to be offered to have to wait until pension age?  I would do it for 6.25% which is the uplift those who pay basic rate on the way in and the way out get.  Others who currently use sal sac, get employer NI added on and pay lower tax rates when retired compared to when earning obviously currently benefit much more from the pension perk than lower earners. 

No doubt lots will try to defend this very regressive tax break but I can't really see the basis for doing so.

I am not defending the tax break, but I think the idea you mention only works for personal / employee contributions to DC schemes.

For employer contributions to DC schemes, that "tax break" might actually end up incurring a higher tax bill than not having the pension contribution.

I can't work out how the flat uplift suggested would work in the case of DB schemes, for either the employer or the employee contribution.

My thinking is that effectively we 'do away with' the concept of employer contributions, simply add that amount to salaries, tax and NI it and then pay it into the pension and apply the uplift.

For DB there is a nominal sum calculated as being the value of the contribution, for example for the civil service alpha scheme this is made up of an employee and employee contribution, again the govt uplift could be applied to this leading to a 6.25% higher DB entitlement being earned.

Then you'll be back to all the pension problems affecting the NHS. Take a doctor on £100k. DB value maybe £30k a year, so they'll be taxed/NI'ed on an extra £30,000, mostly at 62%, an extra nearly £18k in tax. Do you think it'd persuade some to retire early? 

Perhaps, but then perhaps we would need to reduce marginal tax rates to make up.  Still seems fairer to me than making pension saving hugely more lucrative (and thus hugely more costly to the taxpayer) for those who earn more - ie regressive taxation.

Reducing marginal rates would surely negate the point of some sort of flat rate relief system. 

As I mentioned in the other thread, flat rate relief makes sense but I think you'd still need to allow limited employer conts with no taxable benefit. Otherwise it gets too complicated and will cause problems in the NHS etc. And it would make sal sac more equal with non sal sac for BR taxpayers. 

I think it gets too difficult because the big winners of the current system would become obvious if we had to compensate them for the loss of moving to a flat relief system but there is no complexity.  All remuneration is treated the same, all pension contributions get the same percentage benefit.

You seem to be talking about going from an EET system to a TEE system with a topup (like a LISA). Fine if you're starting from scratch. But how would that work in transition? Someone with a DB scheme would presumably get accrual to date as taxable income when they draw it, but future accrual would be paid tax free when drawn? So they'd get a DB pension partly taxed and partly tax free?

So someone who's already accrued a £50k pa pension total (inc state) would be able to accrue further pension from taxed income but not have to pay higher rate tax when drawing it? How would that address supposed unfairness? 

Going to a TEE system for everyone would be ridiculously complicated in transition particularly for DB, and there'd be all sorts of anomalies. Which is why LISAs are limited at a low level and not available to over 40's. 

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.

Even leaving aside the practicalities, is a TEE system really any fairer? 

Take 2 people, both aged 57, so 10 years to SPA at 67. Both in jobs earning £80k. 

Person A decides to go part time until SPA, earning £40k a year for the next 10 years. 

Person B decides to remain full time earning £80k a year but to retire early at 62. Putting £40k a year into his pension for 5 years and and drawing down £40k a year from age 62 to 67. 

So over the 10 years, identical total working, identical total salary. Under the current EET system they'd pay the same tax. Under a TEE system, person B would pay far more tax. 

MK62

Should be stopped

People are taxed on an annual basis though, not over a cumulative X year basis........eg someone earning £100k for one year, and nothing for 9 years, would pay far more tax than someone earning 10k for 10 years, despite the earnings over the 10 years being the same........just the way the tax system works.

My view is that there is no perfect way to limit/stop the advantage that salary sacrifice pension contributors get over non sal-sac pension contributors........but perhaps the easiest way to start would be to make Employer contributions, above a certain level, a benefit subject to employee NI.

westv

Should be left alone

MK62 said:

My view is that there is no perfect way to limit/stop the advantage that salary sacrifice pension contributors get over non sal-sac pension contributors........but perhaps the easiest way to start would be to make Employer contributions, above a certain level, a benefit subject to employee NI.

How would that work for DB schemes?

hugheskevi

Should be left alone

[Deleted User] said:

westv said:

MK62 said:

My view is that there is no perfect way to limit/stop the advantage that salary sacrifice pension contributors get over non sal-sac pension contributors........but perhaps the easiest way to start would be to make Employer contributions, above a certain level, a benefit subject to employee NI.

How would that work for DB schemes?

Not saying its a good idea but it would be pretty straightforward. 

1. Class 1A NIC is due on all employer contributions in respect of benefits accrued on or after [start date] (i.e. doesn't apply to deficit catch up payments).

2. The first [£x] of employer contributions are exempt (if you want your minimum amount, which seems a bit silly to me but this isn't my idea).

3. Employer contributions are deemed to be made when:

a. they would normally be paid to the pension scheme (i.e. employer can't delay making normal payments to avoid NIC).

b. no, or reduced, employer contributions are made due to the scheme being in surplus (the contribution holiday), with the amount of the deemed employer contribution being that which would have been made absent the contributions holiday (just in the same way as NIC paid on deficit payments, its not saved on using a surplus).

c. it the actual employer contributions were lower than they would otherwise have been pursuant to an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions - in which case the full amount of the employer contributions that would otherwise have been made will be deemed to have been made (e.g. if some fancy scheme guaranteed the solvency of the scheme through bank guarantees paid for by the employer).  

4. Any employer contributions made pursuant to an optional remuneration arrangement shall be treated as being paid in respect of benefits accrued at the time the payment is made (i.e. salary sacrifice arrangements don't work).

A 20 year old Civil Servant earning £30,000 would accrue £696 p/a of Defined Benefit Pension. Valuing this using the Added Pension calculator (not quite the right approach, but close enough to demonstrate the point) this is worth a capital sum of £6,700.

A 65 year old Civil Servant earning £30,000 would accrue £696 of Defined Benefit Pension. Valuing it in the same way that is worth a capital sum of £13,400.

Both have an employer contribution of 28.97%. This consists of 5.1 percentage points of past service deficit and 0.27 percentage points of administration costs. These percentages are based on the overall average member contribution rate of 5.6%. These members would pay 4.6% as they are low earners. 

The employer contribution rate changed from April 2024 to be a single rate for all members. Prior to that the rate was tiered by salary. That made no difference to members. If National Insurance were to be based on employer contribution rate, which structure should be used? 

Would it be fair to apply the same amount of employee NICs to these two individuals when the value of the older member's benefits are twice those of the younger member? If not, would applying a different rate or amount of taxation comply with age discrimination laws?

The problem is that employer contribution rates are set at scheme level, so are inappropriate to be used for taxation at individual level. You could calculate individual specific values, but that is a lot of complexity, and only really viable for large schemes to spread the cost over a lot of members.

michaels

hugheskevi said:

[Deleted User] said:

westv said:

MK62 said:

My view is that there is no perfect way to limit/stop the advantage that salary sacrifice pension contributors get over non sal-sac pension contributors........but perhaps the easiest way to start would be to make Employer contributions, above a certain level, a benefit subject to employee NI.

How would that work for DB schemes?

Not saying its a good idea but it would be pretty straightforward. 

1. Class 1A NIC is due on all employer contributions in respect of benefits accrued on or after [start date] (i.e. doesn't apply to deficit catch up payments).

2. The first [£x] of employer contributions are exempt (if you want your minimum amount, which seems a bit silly to me but this isn't my idea).

3. Employer contributions are deemed to be made when:

a. they would normally be paid to the pension scheme (i.e. employer can't delay making normal payments to avoid NIC).

b. no, or reduced, employer contributions are made due to the scheme being in surplus (the contribution holiday), with the amount of the deemed employer contribution being that which would have been made absent the contributions holiday (just in the same way as NIC paid on deficit payments, its not saved on using a surplus).

c. it the actual employer contributions were lower than they would otherwise have been pursuant to an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions - in which case the full amount of the employer contributions that would otherwise have been made will be deemed to have been made (e.g. if some fancy scheme guaranteed the solvency of the scheme through bank guarantees paid for by the employer).  

4. Any employer contributions made pursuant to an optional remuneration arrangement shall be treated as being paid in respect of benefits accrued at the time the payment is made (i.e. salary sacrifice arrangements don't work).

A 20 year old Civil Servant earning £30,000 would accrue £696 p/a of Defined Benefit Pension. Valuing this using the Added Pension calculator (not quite the right approach, but close enough to demonstrate the point) this is worth a capital sum of £6,700.

A 65 year old Civil Servant earning £30,000 would accrue £696 of Defined Benefit Pension. Valuing it in the same way that is worth a capital sum of £13,400.

Both have an employer contribution of 28.97%. This consists of 5.1 percentage points of past service deficit and 0.27 percentage points of administration costs. These percentages are based on the overall average member contribution rate of 5.6%. These members would pay 4.6% as they are low earners. 

The employer contribution rate changed from April 2024 to be a single rate for all members. Prior to that the rate was tiered by salary. That made no difference to members. If National Insurance were to be based on employer contribution rate, which structure should be used? 

Would it be fair to apply the same amount of employee NICs to these two individuals when the value of the older member's benefits are twice those of the younger member? If not, would applying a different rate or amount of taxation comply with age discrimination laws?

The problem is that employer contribution rates are set at scheme level, so are inappropriate to be used for taxation at individual level. You could calculate individual specific values, but that is a lot of complexity, and only really viable for large schemes to spread the cost over a lot of members.

So a practical difficulty in terms of valuing the DB contribution for which rules based on actuarial valuations of an equivalent lump sum investment could be applied?  Does not sound like an impossibility to me.  For funded schemes at any rate you would hope that the employer would know how much their commitment to each individual employee was costing them.

hugheskevi

Should be left alone

michaels said:

hugheskevi said:

[Deleted User] said:

westv said:

MK62 said:

My view is that there is no perfect way to limit/stop the advantage that salary sacrifice pension contributors get over non sal-sac pension contributors........but perhaps the easiest way to start would be to make Employer contributions, above a certain level, a benefit subject to employee NI.

How would that work for DB schemes?

Not saying its a good idea but it would be pretty straightforward. 

1. Class 1A NIC is due on all employer contributions in respect of benefits accrued on or after [start date] (i.e. doesn't apply to deficit catch up payments).

2. The first [£x] of employer contributions are exempt (if you want your minimum amount, which seems a bit silly to me but this isn't my idea).

3. Employer contributions are deemed to be made when:

a. they would normally be paid to the pension scheme (i.e. employer can't delay making normal payments to avoid NIC).

b. no, or reduced, employer contributions are made due to the scheme being in surplus (the contribution holiday), with the amount of the deemed employer contribution being that which would have been made absent the contributions holiday (just in the same way as NIC paid on deficit payments, its not saved on using a surplus).

c. it the actual employer contributions were lower than they would otherwise have been pursuant to an arrangement the main purpose, or one of the main purposes, of which is the avoidance of tax or national insurance contributions - in which case the full amount of the employer contributions that would otherwise have been made will be deemed to have been made (e.g. if some fancy scheme guaranteed the solvency of the scheme through bank guarantees paid for by the employer).  

4. Any employer contributions made pursuant to an optional remuneration arrangement shall be treated as being paid in respect of benefits accrued at the time the payment is made (i.e. salary sacrifice arrangements don't work).

A 20 year old Civil Servant earning £30,000 would accrue £696 p/a of Defined Benefit Pension. Valuing this using the Added Pension calculator (not quite the right approach, but close enough to demonstrate the point) this is worth a capital sum of £6,700.

A 65 year old Civil Servant earning £30,000 would accrue £696 of Defined Benefit Pension. Valuing it in the same way that is worth a capital sum of £13,400.

Both have an employer contribution of 28.97%. This consists of 5.1 percentage points of past service deficit and 0.27 percentage points of administration costs. These percentages are based on the overall average member contribution rate of 5.6%. These members would pay 4.6% as they are low earners. 

The employer contribution rate changed from April 2024 to be a single rate for all members. Prior to that the rate was tiered by salary. That made no difference to members. If National Insurance were to be based on employer contribution rate, which structure should be used? 

Would it be fair to apply the same amount of employee NICs to these two individuals when the value of the older member's benefits are twice those of the younger member? If not, would applying a different rate or amount of taxation comply with age discrimination laws?

The problem is that employer contribution rates are set at scheme level, so are inappropriate to be used for taxation at individual level. You could calculate individual specific values, but that is a lot of complexity, and only really viable for large schemes to spread the cost over a lot of members.

So a practical difficulty in terms of valuing the DB contribution for which rules based on actuarial valuations of an equivalent lump sum investment could be applied?  Does not sound like an impossibility to me.  For funded schemes at any rate you would hope that the employer would know how much their commitment to each individual employee was costing them.

Setting aside the calculation and payroll complexities (a standaridised set of assumptions would need to be developed, published, and maintained - especially around the discount rate to use, actuaries need to calculate scheme-specific tables of factors, payroll then need to implement them, not too big a deal, but all more expenses), you will start to run into Equality problems if you were to go down that route.

In the DC world, equality is usually (although not in all cases) achieved by having the same contribution rate/structure for all members. In the DB world, equality is achieved by all members accruing the same pension.

Both the DC and DB approach are compliant with Equality rules as people are being treated equally. But it is inevitable that the same pension will have a different capital value based on individual characteristics, notably age. It is much less clear that you would be Equality compliant if you taxed people of different ages who are accruing the same pension different amounts of taxation. It would depend whether that was a legitimate aim, and if so, whether it would be proportionate. I suspect a decent case could be made that it was legitimate to tax individuals based on the capital value of their pension. But it would be open for challenge, and if there was any suggestion of DB members being worse off then unions would start a legal challenge.

So although it perhaps could be done, there would be lots of actuarial and legal costs to be incurred both for Govt and individual schemes. You would really need to question whether this is a sensible use of resources to calculate tax liability.

[Deleted User]'s suggestion gets over a lot of the worst factors as it avoids individual taxation and it is a lot easier to manage things at scheme and employer level, but even then there could be incentives for the few remaining private sector DB schemes to close or cut-back benefits, and possibly some of the private companies (eg private schools) participating in public schemes to withdraw. 

crv1963

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?