When the Treasury stated it would not be making wholesale changes to the taxation of pension schemes in the run up to this year’s Budget, this was warmly welcomed, but also prompted speculation on what the Chancellor would do instead.
The good news is that for an industry all too used to the constant changes imposed on it by the Chancellor, this year’s Budget thankfully left employee benefits largely untouched. There were changes, but nothing to compare with those in recent years.
So what was in this year’s Budget?
Another Rise in Insurance Premium Tax
Insurance Premium Tax (IPT) is a tax on general insurance premiums. There are two rates, the standard one having increased from 6% to 9.5% last year. There is also a higher rate of 20% that applies to things like travel insurance.
Following last year’s increase, the industry reacted with a range of negative predictions for the private medical insurance market, none of which have come to pass. However whilst the Chancellor’s newly announced 0.5% increase to 10% from 1 October 2016 is lower than feared, it will mean that the level of IPT has significantly increased in the space of eight months. The increase, to help fund the UK’s flood defences, also means we will have the joint highest tax on healthcare in the EU, matched only by Greece.
This further increase in costs is unlikely to signal the need for more fundamental change to healthcare benefits, but employers may undertake a wider review of their benefits proposition to help mitigate the IPT cost increase.
A combination of reviewing existing arrangements, investment in a range of wellbeing and absence management strategies, and innovative product design can help reduce overall claims and control long-term costs.
A New Lifetime ISA
George Osborne is often described as a very political chancellor, and he has publically set his stall (and perhaps his chances of being the next Conservative party leader) on delivering a budget surplus by the end of this parliament. In ten of his previous thirteen Budgets and Autumn Statements, he has implemented pension changes that have generated him a significant yield.
So, when last year he announced a consultation on pension taxation and then announced in the Autumn Statement that his response to the consultation would be delayed to this Budget, another raid on the pension piggy bank was feared. The fact that it has not happened is down to a combination of factors, including opposition from his back benches and the Pensions Minister, along with a desire not to rock the boat ahead of the EU vote later in the year.
Instead, the Chancellor has introduced a Lifetime ISA to sit alongside the current pension taxation system. Anyone under 40 from 6 April 2017 can save up to £4,000 and the government will put in an additional 25% bonus. Savings, including the government bonus, can be accessed to buy a first home up to the value of £450,000 and in retirement.
Contributions can continue to be made with the bonus added up to the age of 50. Contributions into new Lifetime ISAs cannot be withdrawn in the first 12 months. If funds are withdrawn from age 60, or to buy a first home, the government bonus is retained.
Withdrawals in other circumstances will see the government bonus lost. Where savings are withdrawn before 60 and the bonus is lost, it must be returned to the government and a 5% charge will also be applied.
As with any new product the government is still refining the small print, and consideration is to be given about whether:
Any other specific life events should be added to buying a first home for the purposes of retaining the government bonus; and
If money is withdrawn from an ISA it could subsequently be fully repaid and the government bonus then reinstated.
Salary Sacrifice Still under Spotlight?
Although the government wants to encourage employers to offer certain benefits, it is concerned about the growth of salary sacrifice schemes, where employees receive a lower salary in exchange for benefits-in-kind that are often subject to more favourable tax treatment than salary.
Last year’s Summer Budget and the Autumn Statement both referred to the scrutiny being given to salary sacrifice arrangements by the Treasury. The government is considering limiting the range of benefits that attract income tax and National Insurance contributions (NICs) advantages when they are provided via salary sacrifice. However, the government’s intention is that pension saving, childcare and health-related benefits such as Cycle to Work should continue to benefit from income tax and NICs relief when provided through salary sacrifice arrangements.
This is good news. It remains to be seen, however, what action the government may take and with respect to which benefits. Retail vouchers, for example, may well cease to be used in salary sacrifice.
Creating a Pension Dashboard
With the average person moving between different employers 11 times during their working lifetime, how do you keep track of all your pension savings? Research shows that more than a third of people approaching retirement struggle with this.
Keeping track of where pension savings are located is not a new idea, but the government is demonstrating its support for the concept at this Budget. To help the next generation of pension savers, the government will ensure the industry designs, funds and launches a pension dashboard by 2019.
This makes clear that the government will not provide any financial support to this project. It remains to be seen exactly how the government will achieve this, although it is worth noting that a good deal of work has already been undertaken on this project to date. Concerted industry support will be required to see the pension dashboard becoming a reality within three years.
Minor Adjustments to Pensions Freedom and Choice
This year’s Budget has been relatively quiet for pensions. Obviously the same could not be said of the Chancellor’s statement in 2014, which heralded the advent of flexiblity in defined contribution pension saving. Unsurprisingly, such redical reforms are still being revisited to ensure they work as intended.
The Chancellor has confirmed that this year’s Finance Bill will include measures to:
Re-align the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free (when the trustees/provider is content to do so). This applies to members aged under 75 with less than a year to live, but who have already accessed their pension.
Make serious ill-health lump sums taxable at an individual’s marginal rate when paid in respect of members aged 75 and over.
Convert dependants’ flexi-access drawdown accounts to nominees’ accounts when dependants turn 23, so they do not have to take their funds as a lump sum taxed at 45%.
Allow defined contribution pensions already in payment to be paid as a trivial commutation lump sum, where total pension savings would be under £30,000.
Make top ups to fund dependants’ death benefits authorised payments.
Public Financial Guidance
The government is also implementing all the recommendations of the recent Financial Advice Market Review by:
Consulting on introducing a single definition of financial advice, hus removing regulatory uncertainty.
Increasing from £150 to £500 Income Tax and National Insurance relief for employer-arranged pension advice from April 2017.
Consulting this summer on the introduction of a Pensions Advice Allowance. This will allow people to withdraw up to £500 tax free from a defined contribution pension to help pay for financial advice before the age of 55.
The government will also reconsider how it delivers public financial advice to try to make it more effective. Free to client financial guidance is currently provided by three publically funded bodies. The Money Advice Service (MAS), the Pensions Advisory Service (TPAS) and Pension Wise. MAS is to be replaced by a slimmed down money guidance body, whilst the functions of TPAS and Pension Wise are to be merged into a new pensions guidance body, so people can get all their questions answered in one place. The two new bodies will enter into a partnership agreement to ensure that people who need broader financial advice on both pensions and money issues are directed to the right place, and will be funded by levies on the financial service and pension sectors.
Tax Treatment of Termination Payments
Certain forms of termination payments are exempt from employee and employer NICs and the first £30,000 is free of income tax. The rules are complex and the government feels that exemptions incentivise employers to manipulate the rules, structuring arrangements to include payments that are ordinarily taxable, such as notice and bonuses, to minimise the tax and National Insurance due.
From April 2018, the government will tighten the scope of the exemption to prevent manipulation and align the rules so employer NICs are due on those payments above £30,000 that are already subject to income tax. The first £30,000 of a termination payment will however remain exempt from income tax and the full payment will be outside the scope of employee NICs.
Update on Tax-Free Childcare
From early next year, the government’s new Tax-Free Childcare scheme will be introduced to help working parents with the cost of childcare.
The Chancellor has announced that this will be rolled out in such a way that allows the youngest children to enter the scheme first, with all eligible parents brought in by the end of 2017. The existing Employer-Supported Childcare scheme will remain open to new entrants until April 2018 to support the transition between the schemes.
This will sit alongside the increase of free childcare entitlement from 15 to 30 hours a week for working families with three- and four-year-olds from September 2017.
For once, the Chancellor has not pulled a rabbit out of the hat. The fact the news headlines are all about the sugar tax, indicates that this is a workmanlike Budget, with few, if any, surprises.
This publication is for information only and does not constitute legal advice; consult with legal, tax and other advisors before applying this information to your specific situation.
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