Removal Of 40% Tax Relief On Pension Contributions V Salary Sacrifice

[tatty]

I've read the suggestions in the msm about the removal of upper rate of tax relief for pension contributions.

I'm an upper rate taxpayer in a final salary DB scheme which uses salary sacrifice for pension contributions.

Would I be correct in thinking that because my pension contributions are made via salary sacrifice then a reduction to a flat rate 20% rebate on contributions won't affect me?

[Snagger]

You've opted for a pension and a lower salary, (sound familiar?) unless they make employer pension contributions a taxable benefit, then they can't tax a salary you never had. Just like the millions of fortunate workers who pay nothing towards their pensions (including MPs?)

[tatty]

Thanks snagger, that's good to hear.

Unless they move to block salary sacrifice arrangements of course!

[Ah-so]

Are you making personal contributions in addition to your employer's? I would have thought that you would lose half your benefit from any contributions, so when you give up a net £60 from your salary, only £80 goes into your pension rather than the full £100.

[Snagger]

Are you making personal contributions in addition to your employer's? I would have thought that you would lose half your benefit from any contributions, so when you give up a net £60 from your salary, only £80 goes into your pension rather than the full £100.

You get the full tax "back" as a pension contribution as income tax is never paid on the sacrificed salary.

In simple terms take a 50K salary, you make 10K pension contributions, costs you 7K of net salary and get 2K back in tax refunds and pay 1K NI.

With Salary Sacrifice you take a pay drop to 40K, in return your Employer pays the full 10K difference into your pension., Employer also pays less employers NI. Everyone wins except HMRC.

It would be polically difficult to close this tax "loophole" as a salary sacrifice scheme is at the end of the day nothing more than joining a non contributory pension scheme in return for a lower salary, something the public sector have claimed is their reward and right for decades.

Edited March 3, 2012 by Snagger

[tatty]

i am making personal contributions but via salary sacrifice so the company deducts my contributions before tax (and in the process saves themselves NI contributions).

[Butthead]

I've read the suggestions in the msm about the removal of upper rate of tax relief for pension contributions.

I'm an upper rate taxpayer in a final salary DB scheme which uses salary sacrifice for pension contributions.

Would I be correct in thinking that because my pension contributions are made via salary sacrifice then a reduction to a flat rate 20% rebate on contributions won't affect me?

You are entirely correct.

This fact means that if higher rate relief is removed then the Government would be extremely stupid not to attack/prevent salary sacrifice too. I dread to think how they might do this, but to leave it as a suddenly far more attractive option would be ridiculous.

Edit: Dodgy grammar.

Edited March 3, 2012 by Voice of Reason

[Guillotine]

Are you making personal contributions in addition to your employer's? I would have thought that you would lose half your benefit from any contributions, so when you give up a net £60 from your salary, only £80 goes into your pension rather than the full £100.

No, gross salary is sacrificed, effectively giving highest marginal income tax and ni relief.

[rxe]

If they do this, it will kill pensions totally - the final nail in the coffin.

You accept the restrictions on funds in a pension (fees, inability to make decisions about annuities, inability to access the funds) because of the tax concession on contributions. If the concessions go, then you might as well take the money and invest it yourself. Or spend it. Payback time will be in 20 years so when people have not provisioned properly.

[bmf]

If they do this, it will kill pensions totally - the final nail in the coffin.

You accept the restrictions on funds in a pension (fees, inability to make decisions about annuities, inability to access the funds) because of the tax concession on contributions. If the concessions go, then you might as well take the money and invest it yourself. Or spend it. Payback time will be in 20 years so when people have not provisioned properly.

Yes, Dave Cameron and Gordon Brown will be really upset when, if they are still alive, they sit in big houses with loads of money.

Is your country failing? Pull the demand forward, push the consequences to the back of your mind. UK PLC.

[Butthead]

If they do this, it will kill pensions totally - the final nail in the coffin.

You accept the restrictions on funds in a pension (fees, inability to make decisions about annuities, inability to access the funds) because of the tax concession on contributions. If the concessions go, then you might as well take the money and invest it yourself. Or spend it. Payback time will be in 20 years so when people have not provisioned properly.

It will certainly push the tax efficiency bias towards other types of investment, like ISAs, VCTs/EISs and, dare I say it, property.

[Ah-so]

You get the full tax "back" as a pension contribution as income tax is never paid on the sacrificed salary.

In simple terms take a 50K salary, you make 10K pension contributions, costs you 7K of net salary and get 2K back in tax refunds and pay 1K NI.

With Salary Sacrifice you take a pay drop to 40K, in return your Employer pays the full 10K difference into your pension., Employer also pays less employers NI. Everyone wins except HMRC.

It would be polically difficult to close this tax "loophole" as a salary sacrifice scheme is at the end of the day nothing more than joining a non contributory pension scheme in return for a lower salary, something the public sector have claimed is their reward and right for decades.

So there is a difference between salary sacrifice and making additional voluntary contributions..?

[tatty]

I don't think that is quite true. The pension contributions made by the company that relate to the employees 'contributed share' are accounted for separately and listed as an item on the payslip. If higher rate tax relief on pension contributions was abolished then HMRC would also stippulate that 'employee' pension contributions would no longer be sacrificable at the marginal rate.

In otherwords contributing via a salary sacrifice scheme (which is how most schemes are run now) would not avoid the change.

The government aren't *that* stupid.

In this case how would a defined benefit scheme be affected? I assume either the members and/or employers would need to make up the shortfall?

[Snagger]

I don't think that is quite true. The pension contributions made by the company that relate to the employees 'contributed share' are accounted for separately and listed as an item on the payslip. If higher rate tax relief on pension contributions was abolished then HMRC would also stippulate that 'employee' pension contributions would no longer be sacrificable at the marginal rate.

In otherwords contributing via a salary sacrifice scheme (which is how most schemes are run now) would not avoid the change.

The government aren't *that* stupid.

Not sure appearing on the payslip is legally necessary and is there for employee information only.

it will be a huge can of worms to try and tax, atm you can only claim tax back on the employee contribution part, most employers usually also add a percentage, say employer 10% employee 10%, only the 10% employee contribution could be at threat of losing the tax rebate.

So in that case whats to say in the future changing the ratio to 1% Employee 19% Employer? or 0.1% and 19.9%? it costs the Employer the same at the end of the day, in fact it saves the employer NI.

And even if they do tax this, then in affect they are taxing defined contribution pensions whilst not taxing the superior defined benefit pensions, that's going to be a hard polictical sell, and i'm sure a rich lawyer somewhere will challenge the different tax treatments of defined contribution versus defined benefits, probably breaks human rights

[tatty]

And even if they do tax this, then in affect they are taxing defined contribution pensions whilst not taxing the superior defined benefit pensions, that's going to be a hard polictical sell, and i'm sure a rich lawyer somewhere will challenge the different tax treatments of defined contribution versus defined benefits, probably breaks human rights

Why would this rule change not affect a defined benefit scheme?

[porca misèria]

I've read the suggestions in the msm about the removal of upper rate of tax relief for pension contributions.

They have that scare story every year.

I'm not losing sleep over it.

[Snagger]

Why would this rule change not affect a defined benefit scheme?

because with a defined benefit scheme the monthly employer contribution to the pension pot would be too subjective. Some years the employer make no payments at all, and other years attempt to make up any shortfall, others are unfunded (public sector) and then the defined benefits may change entirely, switching from final salary to career average for example, making it almost imposible to value what an individuals tax on employer pension benefits should be today for a promise tomorrow.

I don't think there would be any political desire to do this anyway, the removal of 40% tax rebate was a political move rather than an economical one, job done. Unintended side affect will be lower NI and tax reciepts, but that's an economical cost the politicians will accept.imho.

Edited March 4, 2012 by Snagger

[Bootsox]

If the scheme is Defined Benefit does any of this really matter (to the employee that is)?

Unless the employer gets that pissed off he closes the scheme.

Edited March 4, 2012 by Bootsox

[gadget]

I don't see the big deal here:

1) The tax benefit will reduce from 42% to 32% (income tax plus NI), not to 0%. Big whoop.

2) Yes salary sacrifice will have to be included. It's not complicated, will just be a taxable benefit like a company car. But tax deductible at the lower rate

3) Sure defined benefit won't be taxed but that's probably a feature not a bug. Employees and the government WANT to encourage defined benefit pensions as it takes the investment returns risk from the employee to the company (shareholders) who can better afford it. But you may have a tough time convincing shareholders that they should take on that risk (which has driven many companies to the wall) to save their employees a bit of tax...

I think pensions policy is pretty messed up. We want to convince people to save for their old age, but the majority of the money goes to those who don't need convincing (the rich).

[Snagger]

I think pensions policy is pretty messed up. We want to convince people to save for their old age, but the majority of the money goes to those who don't need convincing (the rich).

agreed

it's not as simple as just taxing pension contributions made by salary sacrifice, not unless they also tax employer contributions, which currently are not taxed, and I've not heard any threats to do so?

If they did it would include all the existing defined contribution plans whether or not it's salary sacrifice. If they didn't do this then they are just moving the "loophole", not closing it. IE offer staff a new employment contract on lower salary with employee non contributory pension.

[gadget]

agreed

it's not as simple as just taxing pension contributions made by salary sacrifice, not unless they also tax employer contributions, which currently are not taxed, and I've not heard any threats to do so?

If they did it would include all the existing defined contribution plans whether or not it's salary sacrifice.

Yes, that is how it would have to work. But it's not really an increase in all existing contributions, as it's tax deductible (at the lower rate). The majority of money will still effectively be untaxed, just those in the higher rate.

Seems i was wrong before it seems. NI isn't given tax relief on pensions contributions so it's 40% to 20%. And salary sacrifice will still work to save money on NI (which is no different to now)

[libspero]

If they do this, it will kill pensions totally - the final nail in the coffin.

You accept the restrictions on funds in a pension (fees, inability to make decisions about annuities, inability to access the funds) because of the tax concession on contributions. If the concessions go, then you might as well take the money and invest it yourself. Or spend it. Payback time will be in 20 years so when people have not provisioned properly.

I've thought for a while now that a 30% flat rate would be much fairer.

Essentially incentivising low earners to pay into a pension with a 10% reward, and taxing high earners 10% to help off-set the cost while still keeping it attractive.

Can't see it will ever happen because there would be no additional revenue for the government.

[Snagger]

Yes, that is how it would have to work.

But if they did, it would drag people like me, who are just below the 40% tax bracket above the 40% threshold, as my generous (16%) employer contributions would be added to my salary and taxed, whilst my neighbour on a very generous final salary pension scheme already a higher rate tax payer, laughs all the way to the tax office. I don't think any sane politician would attempt this, but then again, many arn't sane.

Edited March 4, 2012 by Snagger

[porca misèria]

I've thought for a while now that a 30% flat rate would be much fairer.

Then go and invest in VCTs and/or EISs, both of which offer tax relief at a 30% flat rate (so a £10k investment gets you £3k tax rebate regardless of whether that £3k was taken from 20%, 40% or 50% income.

Pensions don't rid you of tax, they merely defer it, and for some people help spread the burden over a lifetime. Mess about with tax relief and you'd end up taxing (some) people twice on the same income.

[gadget]

Pensions don't rid you of tax, they merely defer it, and for some people help spread the burden over a lifetime. Mess about with tax relief and you'd end up taxing (some) people twice on the same income.

That's the argument, and it's not a bad one. But the existing pension rules already break that: eg you can take out 25% as a cash lump sum which has never been taxed. Plus higher rate payers already get a big tax break as they pay less tax on the money when it comes out of their pension (at a lower rate) than when they earned it (at a higher rate). Unless they earn more in retirement than when they were working, which isn't sensible...