Budget 2020 Briefing - Employee Benefits
Pensions Savings Boost
Before the Budget there was much speculation that pension savings tax relief, currently available at the taxpayer’s marginal rate of income tax, would be cut and that employer contributions could become subject to tax and national insurance. We lobbied MPs against making such a change and were pleased that this did not materialize.
However, there will be another Budget in November when this may be addressed again. It would be prudent for higher rate (£50,000* plus income) and top rate (£150,000 plus income) taxpayers, who have scope to fund their pension, to do so before the Autumn. We will continue to make the case for the retention of marginal rate relief and the principle of 100% income tax deferral on pension savings with employers retaining corporation tax relief and national insurance exemption.
Employees with income between £110,000 and £200,000 are clear winners. From 2020/21 they will be able to save more in pensions with the benefit of tax relief, as the tapered annual allowance, which gradually reduced their allowance from £40,000 down to £10,000, will no longer apply. This could mean that some employees who have opted out or reduced their pension savings can once more fully participate in workplace schemes.
Those with income between £100,000 and £125,000 are most able to benefit. They receive 40% income tax relief and reduce the income which counts towards a restriction on their personal allowance, (the first £12,500 of income which is usually tax free), when saving in a pension scheme. Someone with income of £125,000 could save £25,000 into pensions and restore the whole of their personal allowance, giving an effective rate of relief of 60% on their savings. If the pension top- up is made by salary sacrifice, national insurance savings will be made too by both employer and employee.
Those with threshold income over £200,000 must work out their adjusted income (which is threshold income plus any employer and employee pension contributions or pension accrual in a defined benefit scheme). If this adjusted income is over £240,000, and up to £312,000 the pension savings allowance will gradually reduce, leaving most of this earnings bracket able to make more tax privileged pension savings than before.
Once adjusted income reaches £312,000 or more, the pension savings allowance will be a flat £4,000, considerably less than the current £10,000. These high earners will need to consider other ways of saving for retirement and employers need to consider whether they will offer alternative remuneration.
For employees who aspire to these levels of income, planning for retirement earlier in life, will be key and mid- life retirement planning can be provided with the help of advice, using the £500 per annum per employee tax free allowance.
The other restriction on tax relieved pension savings, is the Lifetime Allowance, which limits the value of all the private pensions an individual may drawdown. It rises to £1,073,100 from 6 April and annually in line with CPI inflation. Where an individual’s pensions drawn, or at age 75, or on earlier death exceed this, there is a tax charge of 25% of the excess, if this is drawn as income or 55%, if taken as a lump sum.
Low Earners and Tax Relief
At the other end of the pay scale, many lower earners and part time workers, whose earned income is below £12,500, do not receive tax relief on their pension savings if the scheme is operated by net pay or salary sacrifice. The Government have opened a consultation on how this might be addressed. Aspira is already able to offer solutions to employers whose workforce includes lower paid staff.
There was an unpleasant surprise for entrepreneurs, whose tax rate remains at 10% when disposing of a business, in which they own 5% or more, but with the lifetime limit immediately cut from £10 million to £1 million. Strict anti-avoidance provisions will enforce this.
Employers whose employee well-being benefits provide rehabilitation and counselling will be pleased that from April up to £500 per annum per employee may be spent on cognitive behavior counselling as a tax- free benefit. We were also pleased to see the announcement of a review of insurance premium tax. Most insured employee benefits, such as long-term sick pay and death benefits are exempt but private medical cover incurs a 12% IPT charge and we will be making the case for this to be removed.
*Higher rate tax for Scottish resident taxpayers of 41% starts on incomes over £43,430