Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Gavin Moffatt, associate at independent pension adviser City Noble, discusses his expectations for this week’s Conservative government Budget.
It’s well-known that The Chancellor is expected to hit pensions for higher earners, cutting their annual allowance to £10,000 as a trade-off for a crowd-pleasing end to inheritance tax on family homes worth up to £1 million.
Such a move will take higher earners back to double taxation. Any contributions or accrual over the £10,000 will be taxed on the way in and again on the way out. This is more punitive than measures proposed originally by Gordon Brown to limit pension tax relief for higher earners. In 2010 the former Labour Chancellor proposed a mere reduction to 20% tax relief for incoming funds.
Another major perk for working people to boost their pensions, used by many middle and higher earners, is salary sacrifice. While salary sacrifice is always touted as a potential target in any Budget, this time the Chancellor might actually do something about it. If he decides to progress further, in our view any workable attempt would mean not making employer pension contributions in general subject to National Insurance – which would be extremely contentious – but to instead attack the act of sacrifice itself.
This would mean setting down a definition in law and treating amounts sacrificed as earned income. Needless to say it would be hideously complicated, and with everything else to contend with let’s hope salary sacrifice survives another year.
"Higher Earner" Annual Allowance
Reducing the annual allowance has been widely trailed as a Budget measure. This would see those earning over £210,000 a year getting an allowance of £10,000, with a sliding scale from £40,000 to £10,000 for those earning between £150,000 and £210,000.
One of the issues with this is that workers won’t necessarily know what their earnings are until the end of the tax year and it’s therefore extremely difficult to know what their pension allowance is if they fall on the taper scale.
In a Budget irony, it was this issue that led to the previous attempt at curbing high earner pension tax relief being overturned by the new Coalition Government in 2010.
It’s also possible that the use of carry-forward from previous years’ allowances will nullify the tax take from this measure for several years.
Rather than add to the Byzantine complexity of pension tax relief, we would rather see a review of tax relief take place with emphasis on its social purpose, the prevention of double taxation, and the consideration of new methods such as matching State contributions.
Salary Sacrifice
The Chancellor might well try and stretch his general anti-avoidance agenda to salary sacrifice, even though HMRC’s own instructions to its inspectors have been not to treat sacrifice as avoidance.
The courts recognise that we are all entitled to arrange our affairs in the most tax-efficient manner under the law. Therefore any attack on salary sacrifice would seem to mean having to bring employer pension contributions directly into the liability for National Insurance Contributions.
This would be a deeply unpopular and very contentious move, not least because it would also catch employers who had never operated a sacrifice scheme.
But another way might be possible, and that’s to try and attack the actual act of salary sacrifice. The difficulty is in being sufficiently precise in the definition. However, there is precedent for this. For example, abuse of the exemptions for staff canteens was curbed four years ago by dis-applying the exemption if the benefit was linked to a salary sacrifice or flexible benefits arrangement.
We might see a similar attempt in this Budget, although the big questions are whether the Government does actually view this as an abuse to be curbed, and if so whether it is willing to meddle in the private contractual relationship between employer and employee.
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