Many of us will have breathed a sigh of relief on hearing that the Chancellor did not intend to make any changes in the pension tax relief. Whether it was moving to a flat rate (possibly unaligned with any tax-band or to a system) or a more radical approach where pension contributions were treated as taxable, any change would have added a burden to payroll administrators still absorbing RTI while having to cope with the hard bit of auto-enrolment.
Any major change made through payroll would have been disruptive to software providers, in-house managers, bureaux and to accountants. It would have been hugely disruptive to staff, especially high earners in net-pay arrangements. The associated aggravation to pay departments would have been calamitous. The decision not to cause this disruption is good news for payroll and the people that are paid.
But I wasn’t surprised to hear the announcement. I’ve suspected for some months that the Treasury had decided not to implement change through payroll. Change, if we do see it in the budget, will be administered by pension schemes, whether operating on a defined contribution or a defined benefit basis. The two game changers which made this possible (and might still be pulled like a rabbit from the hat on March 16th) are RTI and “scheme pays”.
RTI – we know about. Pension administrators already use it for pensioner payroll but it has never yet been used to identify over and under payments of tax-relief. This could be about to change.
Scheme Pays is a device that allows pension schemes to collect over and under payments either by cashing in units of a member’s pension pot (DC) or by disinvesting part of a DB fund, paying it to HMRC and creating a debit against a future entitlement when the member reaches retirement.
I understand that HMRC had thoroughly scoped their capacity to impose these devices on pension scheme administrators and that taxing benefits rather than contributions was always the big idea. It is possible that the Chancellor might yet announce such a plan in the budget. If he doesn’t it remains the most likely way the Chancellor could make a politically acceptable dent in the £21bn he loses to pensions in tax relief and the £14bn he loses in national insurance.
There are three immensely attractive features of using RTI and Scheme Pays
- It means net pay remains the same, this might be a tax raid but it would be painless.
- The pain would be felt down the line, for those most impacted, that would mean 10,20 ,30 years’ time
- It would put the administrative pain on life insurers, master trusts and occupational pension schemes – soft targets.
There are other pleasant side-impacts. Defined Benefit schemes, long the unloved child, would benefit from a reduction in liabilities. If the Chancellor felt inclined, he could allow schemes to roll up member debt at a high interest rate, “de-risking” liabilities.
More importantly, the Treasury – firm believers in the miraculous powers of RTI, believe that the money could be flowing to them much more quickly than if they relied on the hard-pressed payroll industry. For a Chancellor with the Office of Budget Responsibility breathing down his neck to balance the budget, the prospect of quick tax-receipts is arousing. What is more, Scheme Pays gives him an opportunity to have a go not just at the build-up of DC pension pots, but the accrual of public sector pensions, which are still merrily providing deferred pay for almost everyone paid by the Government. Of the £16bn lost in untaxed employer contributions to occupational schemes, the vast majority is paid by employers to these public sector arrangements.
I am writing before the budget and can’t predict what’s in the Chancellor’s briefcase. But with the benefits of RTI and Scheme Pays I don’t think we’ve heard the last of pension reform.
I’d remind readers that two weeks before the 2014 budget, Danny Alexander (then Chief Economic Secretary to the Treasury) stood in front of the NAPF and told them the budget would see no pension changes. Two weeks later George Osborne announced the pension freedoms.