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Employers' pension tax break may face Budget blow

While pension tax relief is safe from today's Budget, tax breaks offered to employers could be vulnerable.

 
Employers' pension tax break may face Budget blow

The tax breaks offered to employers for paying into a pension could be cut in the Budget as the government looks for way to bring down the pension tax bill.

Fervent speculation about the future of pension tax relief paid on contributions led the chancellor to confirm that no change would be made in the Budget. However, that hasn’t stop speculation on other tax breaks being reined in.

Chris Curry, director of the Pensions Policy Institute, said the fact that employers do not have to pay national insurance (NI) on contributions made to their employees’ pensions equated to a huge cost to the Treasury.

According to Resolution Foundation, in 2013/14 a total of £34.2 billion in tax relief was provided on contributions into pension schemes and NI relief on employer contributions cost £14 billion.

‘The [government] said there would be no change to tax relief, but what about NI? If you look at where a lot of the tax relief is going, it is to the employer,’ he said.

Although scrapping NI relief would hit employers, it would have a knock-on effect for employees.

‘From an employer perspective their [pension] costs would go up,’ said Mike Morrison, pension expert at AJ Bell. ‘There are also currently a lot of people in salary sacrifice who pay pension contributions but get their employer to pay it in for them because it is more tax efficient.

‘[If NI relief was scrapped the employee] would have to bear the costs and it will unwind salary sacrifice. It could result in people paying less into their pension.’

Curry said it could provide a disincentive for employers to pay more into their employees’ pensions than they are legislated to under the auto-enrolment rules.

‘It is tax efficient for [employers] to pay 10% into a pension rather than as salary, even though people would prefer the salary,’ he said. ‘If there is no [financial] reason [to pay into a pension rather than as salary] then it is a brave employer who would pay 10% into a pension when it doesn’t cost them any more to put money into a pension that it does to pay it as salary.’

Pressure builds on tax relief

While the threat to pension tax relief is off the table for now, Curry believe the government could still tackle this thorny issue soon.

The government consultation on pension tax relief reform had outlined three potential outcomes: no change, the introduction of a flat-rate tax relief rather than relief pegged to the rate of income tax paid, or the introduction of a pension-ISA where tax is paid on contributions but not on growth in the pension or withdrawals.

Curry said it would be beneficial if there were no more changes to pensions for the rest of this parliament but added he was ‘not sure that will happen’.

He argued that pension tax relief would become an increasingly costly problem for the government as more workers were auto-enrolled into workplace pensions and started saving.

‘The reason why [change] is still going to be on the table in this parliament is the size of the numbers we are looking at,’ said Curry. ‘The bill [for tax relief] is increasing and over the next five years, with auto-enrolment, people will be paying in more money. That is a few billion for the exchequer to find.

‘There is a strong case for looking at it now and when the costs [have increased] in a few years’ time there will be even more reason.’

Adam Corlett, economic analyst at think-tank Resolution Foundation, said auto-enrolment and pension freedom both raised questions over the need to use tax relief as a savings incentive.

‘Pension freedom….means people no longer have to buy an annuity and have access at 55, so there is no justification for a generous financial incentive,’ he said.

‘Auto-enrolment is also having a huge impact…as it is rolled out it removes the justification for [tax relief] as a financial incentive [for workers to save] as auto-enrolment has done such a good job [of getting them to save].’

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