Pension Contributions-Salary Sacrifice - Good, Bad or Ugly?

[lol-lol]

Salary sacrifice (for pension and tax avoidance).

 

Many employers adopt salary sacrifice.  In a nutshell this diverts salary before it hits ones payslip and results in less employer and employee national insurance and tax.

 

There is renewed interest in this due to the compulsory enrollment in pension scheme which ramps up in April 18.

 

I am morally torn with this but it is a tax avoidance scheme HMRC and UK gov acknowledge and continue to allow to continue.    

https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye

 

I tend to do my own thing under the HMRC rules but as more do this will it harm a government already in dire straight with a new deficit between tax receipts and expenditure and will need to squeeze in another direction to compensate for the lose of tax receipts ? ?

  

 

Edited 17 February, 2019 by lol-lol

[Titanium_Man]

Possibly an ignorant or uneducated statement/question, but is this not the opposite end of the scale/similar to those who become a self employed “consultant” rather than being PAYE? 

[roo]

Look at it another way.  By doing this the government are aiming to save money in the long term. Not only are they making the state pension age higher  (saving money as they will be paying less overall and for a shorter period of time), by making the workforce enrol in a pension scheme, they are making them less reliant on the state pension as well.

As the general population should then have a decent sized pension pot (come retirement), the standard of living for the elderly should also be higher as there would be far less relying on just the state pension to get by, so they would be able to afford more and generally be healthier though being able to afford better food (I appreciate I am slightly generalizing here ), and in theory cost the nhs less.

Also with a salary sacrifice for a pension scheme, they are just deferring when they take the tax, as your accrued pension will still be subject to income tax when you take it.

 

 

The cycle to work scheme has similar motives. You pay less tax as the money is taken out before income tax is applied to buy a bike. After a year You have the option of buying the rest of the bike, and it works out far cheaper then just going to a bike shop and paying the list price of the same bike, income tax or not. 

The idea is you use the bike and get healthier, so again you (in theory) use the nhs less long term and it saves the governement more per person than the tax not taken (of those that apply).

 

It's no different to an isa, another government backed tax avoidance scheme.

 

I've been paying into a workplace pension for 19 years and I'll be 58 when my company pension pot is full up after 40 years (I'm 37 atm). Would I be in a place financially to leave work at that age? I don't know, but I'd more than likely stay on for longer, depending on finances at the time, and how much I have moved on (i am in a manual technical job and by then I might be in an office or the training dept).

 

Then again I am in the fortunate position of working for a large l, mostly good employer, with a good pension scheme that it is almost compulsary to join (it is an opt out scheme, and I've known of only one person do that).

 

Edited 20 October, 2017 by roo
Hopefully making it a bit clearer

[CWARD]

There have been reforms to the salary sacrifice schemes as many were just getting ridiculous i.e. such as car leasing through a salary sacrifice which is rampant in the NHS. Many others were worthwhile such as the already mentioned cycle to work scheme  to enable people to get fitter, less demand on the NHS whilst also taking cars off the road and child care vouchers which enabled many parents to reduce their childcare costs and still able to work.

 

Pension contributions are slightly different as your payments into the scheme are made gross anyway so if they are not made by salary sacrifice then the tax is reclaimed from HMRC by the pension provider to gross up your net contributions. The downside is you are then taxed on the pension you receive which creates greater tax revenues for the government as your pension pot will have grown. Tax at contribution and draw down would lead to double taxation or some very awkward calculation to account only for the growth when drawing the payment at that date which would ramp up administration fees. Also remember that pensions no longer exempt for taxation on dividends from investments since the last Labour government and their tax grab on peoples pension pots.    

There are many other ways of avoiding tax on pension contributions such as contributions made by the company that can be up to your pension annual allowance, currently at £40,000, which again is a tax free contribution but also allowable for corporation tax.  These can be in access of their salaries but a limit on how much can be contributed same as an individual who can only pay in up to their earned income would bring in more tax revenues and make the system fairer to all. The salary sacrifice on pension contributions brings more benefits to the average earner and the government with less dependency on a state pension than the loss of taxes at the contribution level and the complication of calculation to avoid double taxation.

 

As jars stated the so called "Self Employed" who are working alongside other employees doing the same job have a greater impact on tax revenues through lost income tax and national insurance than people using salary sacrifice for pension contributions. The government has already cracked down on public sector consultants who now find themselves as employees or under IR35 rules. No doubt this will be rolled out to private sector too in the not too distant future.  This was also in the report by Angel Gurría, the OECD’s secretary general in his recent address to Phillip Hammond but lost in the noise of those wanting a second EU referendum

Edited 20 October, 2017 by CWARD

[Breezy_Pete]

Tax break for the comfortably off, no?

[Aspman]

It's usually gov sanctioned.

 

I do salary sacrifice for both childcare vouchers and my pension.

[lol-lol]

3 hours ago, jars said:

Possibly an ignorant or uneducated statement/question, but is this not the opposite end of the scale/similar to those who become a self employed “consultant” rather than being PAYE? 

 

It is plain and simple tax (NI in this case) avoidance but legal, virtually sanctioned but it is only done by those companies who administer the scheme.  There are others but this one is growing rapidly due to auto-enrolement whereas many other avoidance measures are being closed down by HMRC.    

[lol-lol]

2 hours ago, roo said:

Look at it another way.  By doing this the government are aiming to save money in the long term. Not only are they making the state pension age higher  (saving money as they will be paying less overall and for a shorter period of time), by making the workforce enrol in a pension scheme, they are making them less reliant on the state pension as well.

As the general population should then have a decent sized pension pot (come retirement), the standard of living for the elderly should also be higher as there would be far less relying on just the state pension to get by, so they would be able to afford more and generally be healthier though being able to afford better food (I appreciate I am slightly generalizing here ), and in theory cost the nhs less.

Also with a salary sacrifice for a pension scheme, they are just deferring when they take the tax, as your accrued pension will still be subject to income tax when you take it.

The cycle to work scheme has similar motives. You pay less tax as the money is taken out before income tax is applied to buy a bike. After a year You have the option of buying the rest of the bike, and it works out far cheaper then just going to a bike shop and paying the list price of the same bike, income tax or not.    The idea is you use the bike and get healthier, so again you (in theory) use the nhs less long term and it saves the governement more per person than the tax not taken (of those that apply).

It's no different to an isa, another government backed tax avoidance scheme.

I've been paying into a workplace pension for 19 years and I'll be 58 when my company pension pot is full up after 40 years (I'm 37 atm). Would I be in a place financially to leave work at that age? I don't know, but I'd more than likely stay on for longer, depending on finances at the time, and how much I have moved on (i am in a manual technical job and by then I might be in an office or the training dept).

Then again I am in the fortunate position of working for a large l, mostly good employer, with a good pension scheme that it is almost compulsary to join (it is an opt out scheme, and I've known of only one person do that).

 

 

You are assuming that one stays in the UK when one gets ones pension which many do not and also they will continue to "tax plan" to avoid paying tax at the second time of asking too.

 

It just seems a bit unfair to those not in the scheme ie they will be paying 5% or so or more NI just because they are not in the scheme !

 

[S00perb]

3 minutes ago, lol-lol said:

 

It is plain and simple tax (NI in this case) avoidance but legal, ............

 

 

What Is the Difference Between Tax Avoidance and Tax Evasion?

The terms "tax avoidance" and "tax evasion" are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal, while tax evasion is not. 

 

I avoid being caught drink driving by not drinking and driving

I evade being caught for drunk driving by driving a route I don't think the coppers will be waiting for me.

There is nothing even vaguely dodgy about tax avoidance, whatever the papers try to say.

[lol-lol]

35 minutes ago, Wino said:

Tax break for the comfortably off, no?

 

Well our scheme will include those on the lower wages, once they have done their qualifying period, 6 month or whatever, and will only be 3% of their wage so not a huge amount.

 

I think it is the middle income earners, who pay much of their wage at the full NI rate, who might benefit most.

 

For high earners it is not such a big benefit because after £45K you only pay NI at a couple of percent anyways.

 

The companies want to do as they pay huge amount of NI and the ceilings are different ie rate does not drop off like employee NI rate at a trigger point.

 

Edited 20 October, 2017 by lol-lol

[lol-lol]

1 minute ago, S00perb said:

 

 

What Is the Difference Between Tax Avoidance and Tax Evasion?

The terms "tax avoidance" and "tax evasion" are often used interchangeably, but they are very different concepts. Basically, tax avoidance is legal, while tax evasion is not. 

 

I avoid being caught drink driving by not drinking and driving

I evade being caught for drunk driving by driving a route I don't think the coppers will be waiting for me.

There is nothing even vaguely dodgy about tax avoidance, whatever the papers try to say.

 

Agreed.

It is my job to avoid taxes for companies ie setting up customs warehouses, inward processing schemes.  

 

Is it those that cannot afford the admin to run tax avoidance schemes that lose out to those that do?   

[CWARD]

@lol-lol if you are saying that salary sacrifice for pensions contributions is bad, what do you suggest as an alternative that doesn't penalise those on lower incomes and without increasing pension admin costs?

[Breezy_Pete]

5 minutes ago, lol-lol said:

I think it is the middle income earners, who pay much of their wage at the full NI rate, who might benefit most.

That's what I was saying. 

Low paid won't have 'spare' income to sacrifice.

[S00perb]

2 minutes ago, lol-lol said:

 

Agreed.

It is my job to avoid taxes for companies ie setting up customs warehouses, inward processing schemes.  

 

Is it those that cannot afford the admin to run tax avoidance schemes that lose out to those that do?   

Don't know about that line of business, but surely it would be the same as getting a good accountant. They are not good unless they are saving you money.

I know that people get wound up about me being a consultant and being able to claim tax back on my expenses, but I in turn get wound up about MPs getting their actual expenses back (the 2 are very different and many people can't see that difference).

I am not running or taking advantage of some tax avoidance scheeme, I am just complying with the law, filling in the forms I am asked to do on my self assesment.

[CWARD]

2 minutes ago, Wino said:

That's what I was saying. 

Low paid won't have 'spare' income to sacrifice.

 

We operate many payrolls for varying size companies and staff earnings. We didn't expect much of a take up on Auto-Enrolment pensions schemes but have been surprised by the up take with very few opting out of the 1000's of employee's we have on the schemes who were automatically enrolled onto them. A sizeable proportion have increased their contributions above the minimum 1% and even those who didn't automatically qualify due to earnings below the tax threshold have joined too.  The ones that tend to opt out are those that already have a pension scheme were they are making sizeable contributions but most see it as a pay rise from their employer that they would not have received otherwise even if it does go straight into a pension pot.

To say it is wrong when it has encouraged so many to actually start planning for their future when state pensions are being paid later and later regardless of their ability to still be able to work seems ridiculous. The amounts that Lol-lol refers to as ramping up in April 18 will hardly make a difference to tax revenues.

Date	Employer minimum contribution	Total minimum contribution
Employer's staging date to 05/04/18	1%	2% (including 1% staff contribution)
06/04/18 — 05/04/19	2%	5% (including 3% staff contribution)
06/04/19 onwards	3%	8% (including 5% staff contribution)

  

The benefits of people who would not normally have provided for a pension and would have otherwise solely relied on a state pension must surely outweigh the loss in tax revenues. The future tax revenues on these pensions when people start to draw on them will also far outweigh the current loss. 

[Breezy_Pete]

I didn't say it was wrong, did I? I chuck a fair wedge in each month.

@CWARD: since you seem to know what you're on about in this area - hypothetically speaking...if a company was taking pension contributions from their staff pay packets, but was considerably behind the present time in terms of paying them into the pension company, that would be dodgy, right?

 

[S00perb]

Things to consider before taking a salary sacrifice

• Sacrificing part of your salary means you earn less. This might affect maternity pay or mortgage applications.
• Lower earnings might also affect your State Pension or contribution-based state benefits. These might include Jobseeker’s Allowance and Employment and Support Allowance. However, you might be able to claim more tax credits.
• A lower salary, as a result of salary sacrifice, means any life cover through a scheme at work could be less. It’s worth checking – some employers do provide life cover at your original salary so you don’t lose out.

 

Loads of really good info here;

https://www.moneyadviceservice.org.uk/en/articles/salary-sacrifice-schemes

[CWARD]

@Wino I wasn't saying that you were saying it's wrong just that the low paid are actually making salary sacrifices even though most cannot afford to as they see the benefit of providing for their future and mostly this is because they didn't feel a noticeable difference when 1% of their gross pay was deducted from their earnings and paid into a pension scheme when they were automatically enrolled onto it and had to opt out if they no longer wanted to make contributions.

 

7 minutes ago, Wino said:

since you seem to know what you're on about in this area - hypothetically speaking...if a company was taking pension contributions from their staff pay packets, but was considerably behind the present time in terms of paying them into the pension company, that would be dodgy, right?

 

The company is liable to the pension scheme and all deductions are reported to the pension provider at the time. If the payments are not made within the allotted time frame they are chased for payment. Failure to pay then and they are reported to the pensions regulator where a first offence you get a warning, failure to correct the balance and it escalates quite quickly into fines which increase daily. The checks and balances are fairly robust from everything from putting staff on the scheme or avoiding doing so, continous checking of staff who become eligible for automatic enrolment, reporting to the pension provider and payment of contributions.  

http://www.thepensionsregulator.gov.uk/press/pn16-22.aspx 

 

Pension providers that are not auto-enrolment eligible are usually quite vigorous in ensuring they receive their money for the contributions too with debt collectors and court action.  Unfortunately the same can't be said for a company owned pension scheme such as BT's where the regulator has had to step in to ensure more is being invested in the funds to meet future commitments and under FRS102 their is now more reporting pension provisions but it still lacks behind the protection provided by using a pension provider.

[KenONeill]

Are we talking about the same thing here? I thought that salary sacrifice involved a ceremonial dagger, 2 votive candles, an altar and a baby goat.

[CWARD]

Just now, KenONeill said:

Are we talking about the same thing here? I thought that salary sacrifice involved a ceremonial dagger, 2 votive candles, an altar and a baby goat.

 

Whatever you get up to in Scotland on those dark winter nights shouldn't be posted on an open forum  

[S00perb]

17 minutes ago, KenONeill said:

Are we talking about the same thing here? I thought that salary sacrifice involved a ceremonial dagger, 2 votive candles, an altar and a baby goat.

lol

Reminds me of the lyrics to a Chris Wood song

They're sacrificing chickens to a god they call quantitative easing

[Titanium_Man]

13 hours ago, lol-lol said:

 

It is plain and simple tax (NI in this case) avoidance but legal, virtually sanctioned but it is only done by those companies who administer the scheme.  There are others but this one is growing rapidly due to auto-enrolement whereas many other avoidance measures are being closed down by HMRC.    

 

I was trying to avoid that phrase.... but yeah, avoidance is what I was getting at and clearly this appears to be. Legal, of course.  

 

I should get on the bandwagon. 

[lol-lol]

13 hours ago, KenONeill said:

Are we talking about the same thing here? I thought that salary sacrifice involved a ceremonial dagger, 2 votive candles, an altar and a baby goat.

 

Then there is the Australian health fitness version......

 

https://concoctionary.com/2012/01/06/celery-sacrifice/

[lol-lol]

5 hours ago, jars said:

 

I was trying to avoid that phrase.... but yeah, avoidance is what I was getting at and clearly this appears to be. Legal, of course.  

 

I should get on the bandwagon. 

 

What is good for the goose should be highlighted for the ganders  for fairness.

 

As this mainly affects National Insurance is this bad for government coffers for the NHS?   (Not that the government reserves NI for the NHS !).  

[lol-lol]

18 hours ago, S00perb said:

Things to consider before taking a salary sacrifice

• Sacrificing part of your salary means you earn less. This might affect maternity pay or mortgage applications.
• Lower earnings might also affect your State Pension or contribution-based state benefits. These might include Jobseeker’s Allowance and Employment and Support Allowance. However, you might be able to claim more tax credits.
• A lower salary, as a result of salary sacrifice, means any life cover through a scheme at work could be less. It’s worth checking – some employers do provide life cover at your original salary so you don’t lose out.

 

Loads of really good info here;

https://www.moneyadviceservice.org.uk/en/articles/salary-sacrifice-schemes

 

• Not necessarily if the employer shares their massive saving in NI.
• We are being told that mortgage lender will consider whole employee package ie including the SS which is quite right
• Some calculation which do look at gross income from payslip would suffer from this SS circumvention of PAYE.  

Edited 21 October, 2017 by lol-lol