Our Thoughts on the 2009 Pre-Budget Report -
16.12.09
In this summary:
1. Pension anti-forestalling rules changed
2. Personal Accounts - the Government has confirmed it will delay the introduction of the pension reform changes
3. Salary sacrifice increasingly attractive as national insurance increases
4. Changes to taxation of pension short service lump sums
5. Staff Canteens
1. Further restrictions to pension tax relief for higher earners could affect 150,000 additional people
The Government has decided to extend the pension tax changes announced in April's Budget. The anti-forestalling regime which limits the level of higher rate tax
relief which people can receive on pension contributions in advance of April 2011, has been extended - from 9th December 2009 - to impact those with relevant
income of £130,000 and over. It was previously £150,000 and over.
The longer term changes, which will be effective from April 2011, originally meant people with income of £180,000 and more would only receive basic rate tax
relief. Those with income between £150,000 and £180,000 would get tax relief somewhere between basic rate and higher rate on a sliding scale.
However, the Government has now decided that the definition of relevant income (used in determining whether an individual is affected by these changes) will include
employer pension contributions. However, those with incomes below £130,000 before the inclusion of employer pension contributions will not be affected. So, in
simple terms, anyone with income of £130,000 or more will not receive higher rate tax relief on their contributions.
Comment:
This is a very disappointing move, further breaking the long standing principle that an individual receives tax relief on their pension contributions at their highest marginal rate. Continuous changes to pension tax rules do nothing to encourage saving, and we urge the Government not to proceed with this move. We need clear, simple rules for the long term to encourage more people to save and help address chronic under saving in the UK.
2. The Government has confirmed it will delay the introduction of the pension reform changes
There were two key changes announced by the Chancellor:
Smaller employers will not have to automatically enrol their employees until a later date - these employers will now take on their duties after October
2015 rather than before.
There is a one year delay for all employers in reaching the full contribution level of 8% (with at least 3% from the employer) - this will now be reached
in October 2017 rather than from October 2016.
Comment:
This delay in having to automatically enrol employees in a pension scheme and pay contributions to their pension pots, will come as a welcome relief for small
businesses who are likely to be still recovering from the effects of the recession in 2012. However, as it will now be 2017 before the full 8% payment kicks
in, savers will not build up significant savings until after 2030. While this may be a short term gain for the Government through lower tax relief, it will
likely lead to long term pain as higher levels of means tested benefits will need to be paid, as people will not have as much retirement savings to see them
through their later years.
3. Salary sacrifice increasingly attractive as national insurance increases
The budget confirmed that all national insurance rates will increase from April 2011 by 1% (an increase of 0.5% had already been announced, with the PBR adding a further 0.5% increase).
Comment:
Putting in place a salary or bonus sacrifice arrangement is likely to prove a popular option for many people. Sacrificing salary or bonus to reduce national
insurance can be part of an effective tax planning strategy. However, the associated changes to higher rate pensions tax relief means those people with incomes
of £130,000 and over may not find salary sacrifice in exchange for an employer pension contribution an attractive option.
What is salary sacrifice?
Salary sacrifice allows an employee to give up part of their pay in exchange for an alternative non-cash benefit. It offers tax and national insurance
savings, allowing greater employee benefits (such as pensions) at no extra cost to the employee or employer. Salary sacrifice is growing in popularity, both
as a way of making pension payments and for other benefits like childcare vouchers. These changes to national insurance make it even more tax efficient.
The benefits of salary sacrifice
Income tax is calculated on the lower (sacrificed) salary - a saving of 20%, 40% or 50% of the amount sacrificed, (although in some circumstances a taxable benefit
may arise on the non-cash benefit). In addition national insurance is paid on the lower salary. After the increases in 2011, this will give a saving of 12% of
earnings below £43,888, and 2% of earnings above that level. The employer will also save 13.8% NI and many employers use some, or all, of this saving to boost
the employee's pension contribution.
4. Changes to taxation of pension short service lump sums
In his 2009 Pre-Budget Statement, the Chancellor announced that the rates of taxation for short service refund lump sums, and the levels on which they apply, will
change with effect from 6 April 2010. Currently, short service refund lump sums are taxed at a rate of 20% on the first £10,800 of the refund and 40% on the
remainder. From 6 April 2010, this will change to 20% on the first £20,000, and 50% on the remainder. The increase to the lower threshold means that some people
will have less tax to pay. However, those with larger funds could face higher tax charges, which could be higher than the relief they received when they made the contributions.
5. Staff Canteens
Where free or subsidised meals are provided in a canteen or otherwise on an employer’s premises, this benefit is currently exempt from tax and National
Insurance. The exemption will now be withdrawn where such benefit is provided in conjunction with a salary sacrifice or flexible benefits arrangement. Under
such arrangements the exemption will be replaced by the normal rules for taxing employer provided benefits, attracting tax and employer’s class 1A National
Insurance contributions on the benefit in kind provided.
The benefit of free or subsidised meals continues to be exempt from tax and National Insurance contributions where provided as a perk, i.e. not in conjunction
with a salary sacrifice or flexible benefits scheme, and made available to all employees.
If you have any questions in relation to any of the above topics please do not hesitate to contact us.
Employee Benefits Director