Chancellor George Osborne delivered the 2016 Budget on 16 March. The government had promised that this would have included an announcement on the outcome of its consultation on pension tax relief, but it has published only a summary of the responses it received and suggested that the new Lifetime ISA will address some of the issues raised in the consultation.
There are no further changes to the lifetime or annual allowances other than the previously announced changes such as the reduction in the lifetime allowance to £1M and the tapering of annual allowance from 6 April 2016. The measures affecting pension schemes are summarised below, along with some relevant points on non-pensions taxation and savings.
- No changes to Pensions tax relief (other than income tax band changes below)
- Lifetime ISA to be launched for those under age 40, with 25% bonus for saving
- No change to salary sacrifice arrangements with ring -fencing of pension, childcare and health related benefits from future review
- Increase from £150 to £500 employer funded individual advice that attracts relief from tax and NI
- Previously announced annual allowance and lifetime allowance changes remain in place
- From early 2017, the long awaited Government childcare tax- free scheme will be implemented on a phased basis. The existing salary sacrifice childcare voucher scheme will remain open until 2018.
- IPT will be increased by 0.5% from 1st October 2016
- Increase in personal allowance and high rate tax threshold from 6 April 2017, to £11,500 and £45,000 respectively (although increase in 40% threshold may be unlikely to apply in Scotland)
- Introduction of employers NIC on certain employment related termination payments, previously exempted
- Increase in ISA allowance from £15,240 to £20,000 in April 2017
- Introduction of Help to Save scheme for those on lower incomes
A new Lifetime ISA will be available from April 2017 for adults under the age of 40. They will be able to contribute up to £4,000 per year up to the age of 50, and receive a 25% bonus on the money contributed.
Funds, including the bonus, can be withdrawn from age 60 or be used to buy a first home (up to the value of £450,000) at any time from 12 months after the account opening.
Lifetime ISA funds may be withdrawn at any time for other purposes, with no bonus and subject to a 5% penalty. The government will consider whether funds plus the bonus can be withdrawn without penalty in other limited 'life event' circumstances. The government will also explore whether there should be the flexibility to borrow funds against the Lifetime ISA. Final details will be set out later this year.
The overall annual ISA subscription limit will be increased to £20,000 from 6 April 2017 (from the £15,240 applying in 2016/17).
Help to Save
A new Help to Save scheme has also been announced for people on low incomes, providing a 50% government bonus on up to £50 of monthly savings.
Whilst the introduction of new savings incentives focussed on younger savers is welcome it begs some interesting questions about how younger employees will decide where to invest if their funds are limited, and will the introduction of LISA mean an increase in opt out rates?
Advice and information
The government will ensure that by 2019 the pensions industry will have launched a 'pensions dashboard', a digital system where an individual can view all their retirement savings in one place.
This is a brave assertion as there is no really clear plan about how this will be done. We already have the technology to aggregate pension and other financial assets so employees will not have to wait for the Government to introduce this.
The government will also increase the existing £150 Income Tax and National Insurance threshold for employer- arranged pension advice, so that instead tax is charged on the excess of the cost of the advice over £500.
It will also consult on introducing a Pensions Advice Allowance so that people can withdraw up to £500 tax free from their defined contribution pension before age 55 to redeem against the cost of financial advice. We will need to wait and see the legislation for this new benefit.
We have already seen a big increase in the demand for workplace financial education and advice and guidance services to cope with annual and lifetime allowance issues and pension flexibilities. We expect that demand to increase further to cope with helping employees understand the new savings options and how they interact with pension saving. We also expect employers to require more support to manage their benefit spend since the potential increase in opt-out rates are likely to impact different workforces in different ways.
Technical amendments, including for pension flexibility
The government will consolidate pension flexibilities rules to ensure that these are working as intended, including the following minor technical amendments:
- re-aligning the tax treatment of serious ill-health lump sums with lump sum death benefits, so that they can be paid tax-free when someone aged under 75 has less than a year to live but has accessed benefits
- making serious ill-health lump sums taxable at an individual's marginal rate when paid in respect of individuals aged 75 and over
- legislating to 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%
- allowing defined contribution pensions already in payment to be paid as a trivial commutation lump sum
In the 2015 Autumn Statement, the government proposed to reduce the calculations needed to determine whether a dependants' scheme pension exceeds the authorised limit. Following consultation there will be further reductions to the number of calculations that need to be carried out.
Salary Sacrifice and EFRBS
The government is considering limiting the range of benefits that attract income tax and National Insurance advantages when they are provided as part of salary sacrifice schemes. However, its intention is that pension saving (together with childcare and health-related benefits) will not be affected by this review. Following the informal consultation on Unfunded Employment Retirement Benefit Schemes, announced at Autumn Statement, the government will keep this issue under review.
So what might the Government be considering? No doubt we will see further reference to this topic in due course, but it is perhaps worth noting that the vast majority of benefits regularly offered by salary sacrifice arrangements, other than those listed above, are already subject to tax and Class 1A NIC (e.g. travel insurance or company cars, etc.) so the only potential loss to the Exchequer is a small amount of Primary Class 1NIC. The limitation could apply to some little used benefits such as car parking at or near the place of work or work related training - which whilst they can be provided via salary sacrifice do not appear to be widely used. It is also possible that any future examination by HMRC of the perceived attraction of using salary sacrifice may be overtaken by wider measures being considered by the Office of Tax Simplification (OTS) such as the closer alignment of PAYE and NIC. For example, one of the OTS proposals considers the abolition of Class 1A NIC. If this is adopted by the Government in due course this may well see benefits becoming liable to Primary Class 1NIC, and as such removing any perceived imbalance between cash and non-cash remuneration.
For the majority of employers that provide benefits via salary sacrifice on a standalone basis or as part of a flexible benefit arrangement, this announcement will provide reassurance as it confirms that it is not the intention of the Government to change anything regarding the most popular benefits.
From April 2018, termination payments over £30,000 will be subject to employer's NIC. This is a significant change to current practice. The government will also tighten the scope of the income tax exemption for termination payments to prevent manipulation.
Travel and subsistence expenses rules
In September 2015, a discussion document was published to request views on modernising the tax rules for travel and subsistence. The government has analysed the responses and concluded that the current rules are generally well understood and work effectively for the majority of employees. There will therefore be no further changes to these rules at this time. This may be seen to be good news. However there are likely to be many who feel that there are some areas where the rules do not appear to be suitable for modern practice.
The government will however be introducing legislation in Finance Bill 2016 to restrict tax relief for home to work travel and subsistence expenses for workers engaged through an employment intermediary. This will bring the rules into line with those that apply to employees.
National Living Wage
From 1 April 2016, low wage workers aged 25 and over will be entitled to receive the NLW which will initially be set at £7.20.
Apprentices under 25
From April 2016, there will be an exemption from employer's NIC (up to a certain threshold) for apprentices under the age of 25.