Taxing times ahead ....
The PBR tax increases were significantly less aggressive than commentators
suggested we needed to address the deficit we face. The ‘soon to be opposition’
might argue that this is to prevent stalling the recovery; the cynical might say
the big decisions are being pushed back till after the election.
So far we have seen a restriction in pensions relief for higher earners and
yet another increase to National Insurance rates. From tax year 2011/12 the
headline NI rate will reach levels not seen since the ‘70’s, a full 12% for
employees and a whopping 13.8% for employers!
Can this be mitigated? In part, yes, and you can gain significant savings in
both employer and employee National Insurance payments by using enabling your
employees to make their pension contributions via Salary Exchange. Put simply
Salary Exchange works by an employee giving up part of their gross earnings while
their employer purchases something directly for them instead. The process is tax
neutral where the employer buys anything which results in a P11d charge for the
employee, but for certain benefits (particularly pensions) it is highly tax efficient.
Example
Take the example of an employee in their early thirties earning £30,000 per annum and
making a gross monthly pension contribution of £100. Based on the tax and NI rates
applicable this year if this employee decided to adopt what we call “Smart Sacrifice”,
where their net salary remains the same and all the employers NI savings are re-invested
into the pension scheme, then their total annual pension contribution would rise from
£1,200 per annum to £1569.39 after exchange, As the table below demonstrates this improvement
comes at no additional cost to either the employer or the employee.
This basic rate tax payer has achieved an effective rate of tax relief
approaching 39%!! As the graph below shows, assuming 7% growth this employees
fund at 65 might be nearly £30,000 more as a result of the additional
contributions from adopting Salary Exchange. The benefits of Salary
Exchange will be even greater from 2011 onwards when the increased NI rates
take effect.
Use it or lose it?
NI (in conjunction with Income Tax and VAT) is one of HMRC’s ‘big three’
revenue producers. Indeed the treasury anticipates raising an additional
£3bn in revenue from the 2011 NI increases. Clearly the more employers change
to Salary Exchange the less revenue HMRC will see from this source.
They have already hinted at increased levels of scrutiny into NI avoidance schemes.
Given this it is possible that some form of anti-forestalling measure may be
introduced, similar to that now applying to higher earners for pension’s tax
relief. However, as a rule, tax legislation generally seeks not to be retrospective.
Our feeling is that those employers adopting Salary Exchange sooner rather than
later will have a far greater chance of keeping their arrangements in place
should HMRC decide to stop the practice in future.
How can Lighthouse Group Employee Benefits help you?
We have a deep understanding of the practical and technical issues that
surround Salary Exchange and can help you show your how to exploit this highly
tax efficient pension payment route to the full. For further details please
contact Steve Howard on 0161 819 4940 or email
steve.howard@lighthousegroup.plc.uk