Finance Blog: Neston and Beyond - The Sacrifice of Salary Sacrifice?
|Published: 30th May 2014 16:58|
There is a bit of a worry and a wobble going on in 11 Downing Street, and it is more than the mystery of how Freya, (the Chancellor's cat) managed to cross the Thames last week. (Don't panic, she's has been returned, crisis averted, worry not.)
During a moment of altiloquence, the Chancellor made a populist move in the March budget announcements on pensions, but in the same way he said free "advice" to all in the speech, but the word "guidance" was in the document, something else will have to change after the event. To explain the story, I am obliged to explain (as briefly as I can) two facets of the pension world. The story follows.
1. Salary Sacrifice.
This is a well established practice for employees and employers. What this means is if say, you have a contracted salary of £40,000, you and your employer can agree to pay you a reduced sum via the payroll, say £30,000, but pay the rest into your pension. Either side can cancel the arrangement. Why is this popular and well established? Well the employer doesn't have to pay National Insurance (NI) on the amount going into the pension, the contribution is deductible against corporation tax, the employee only pays tax and national insurance on the reduced salary, plus they get a chunk of money into their pension pot. This is very popular with some of the worlds largest employers with UK operations such as Shell & Mercedes Benz running this system almost uniformly.
2. Pension Options at age 55.
Well as you know, before the budget, if you had a personal pension or 'money purchase' pension, at age 55 or older if you wanted to, you could draw 25% as tax-free cash, and with the rest, your options were:
Leave it invested.
Draw on it as income, but with an annual limit.
Buy an annuity.
Following the budget, your options are from April 2015, or just before the next general election (quelle surprise):
Leave it invested.
Draw on it as income, but with no annual limit.
Buy an annuity.
Why are these two items now a story? Well it could cost the Treasury, or rather you and me as taxpayers, many billions, some estimate as much as £20bn a year. How so?
Well the thing is, there is nothing wrong, based on the current rules of salary sacrifice if they remain as they are after April 2015, for the employer and employee agreeing to pay the full £40,000 into a pension policy, but immediately, if aged 55 or older, the employee draws 25% tax free cash (£10,000) and then takes an income from the fund of £24,866, set against personal tax allowance.
The employees 'take home' is the same as taking taxed salary but only £5,133 is paid in tax, as opposed to £10,107 in Tax & NI, plus he or she has still got £5,000 in the pension pot, and the employer saves around £4,700 in NI payments.
This is a loss to the treasury in our example of a little under £10,000 per annum per employee.
There are a large number of people aged over 55 working in the private sector, and thanks to the failings of successive governments, precious few are in final salary pension schemes, so why wouldn't they do this.
As you might imagine, this has occurred to someone down that London, and there are some scare stories beginning to do the rounds about the removal of the tax free cash portion, or cash limits on drawings, but these are completely politically unpalatable. My foolish prediction is the salary sacrifice rules will be changed to limit the amount that can be sacrificed to say, no more than 10% of salary. If I am right, remember you heard it here first.
If I am wrong, forget I mentioned it.
Bye for now,
P.S. I haven't forgotten (Edit by Alison; yes he had) proposed future topics are making use of your ISA allowances, pensions, life assurance rates, income protection, 'Auto Enrolment', Contango and Normal Backwardation.
Disclaimer: 'Neston & Beyond' and similar articles written by me are my personal views and the sole aim is to where possible inform, sometimes amuse, occasionally entertain and hopefully, if all else fails, at least be interesting. In no way can any of what you read here be taken as advice of any form, be it parental, lyrical, electrical, prognosticative, desirable, ichthyological, astronomical, factual, governmental, statistical, financial, legal, marital, occupational, political, philatelogical, sociological, incidental, accidental, fiscal, zoological physical, biological, medical, dental, accidental, haberdasherial, cosmological, or tangential.
John C. Cartlidge
Tel: 0151 336 6610