Salary Sacrifice – a foot in the door for the poorly pensioned?

foot in the door

Everybody knows that the pension tax-relief system is heavily weighted in favour of the have’s who get big income tax incentives. It is weighted against the low waged who can get excluded from contribution incentives altogether.

Steve Webb, who thinks about these things, has announced he’d like to see even those on minimum wage, being able to participate in some of the tax and NI saving activities of those who earn more than him.

I’m not an actuary, and I’m getting some experts to run a check on these numbers (which may change when they have) but here’s the Pension Plowman’s stab at how salary sacrifice (some call it salary exchange) could work for the low paid.

An employee is  on minimum wage of £7.50 an hour working 40 hours a week. Weekly pay = £300 so annual pay is £15,600. This person will be auto-enrolled and pay basic rate tax.

The employee pays 12% employee NI on earnings above £157 a week so 12% of (£300 – £157) = £17.16 a week.

In addition the employer pays 13.8% NI on these same earnings.

If they could pay pension contributions of say £10 a week by salary sacrifice they would save £1.20 in NI (and still get tax relief) and the employer might share some of its NI saving,

So a minimum of a 12% effective uplift for the employee , simply by sharing the saving 100% of the NI saved on his/her earnings, a maximum of nearly 26% uplift if the employer savings are shared.


The minimum wage dilemma

So why don’t salary sacrifice/exchange schemes operate for those on minimum wage?

I asked the question to payroll’s answer to Martin Lewis – Kate Upcraft and this – is -what – she -said!

No problem for us to administer – we simply reduce gross pay but it’s illegal to reduce gross pay below NMW and given the amount of unpleasant and damaging publicity about NMW non compliance at the moment, including the sleep in debate I can’t see the law changing

I had to look up “sleep in debate” – I thought that this was an all-nighter at the House of Commons- but it’s about carers who sleep at their client’s house in case something happens in the night (and get paid for attendance).

Kate’s substantive point is that the Conservative Party wouldn’t risk annoying other parties by allowing people to choose how they had their minimum wage paid to them.

Salary sacrifice is not something that happens to you like auto-enrolment, it’s not done on an opt-out, you have to opt-in to salary sacrifice, and you’d only opt-in to something, if you thought it was good for you.

Earning between 12% and 26.8% uplift on your pension contributions looks like good news. I’d choose that if there were no downside. I could try and construct a downside to pension salary sacrifice -SS (as opposed to the same contributions being made with SS) but I’d be struggling.

Denying people on minimum wage the opportunity to get more paid into their pension pot seems perverse. The Labour opposition should join with Steve Webb in calling for this practice to be allowed. Kate Upcraft has no practical objections and I’m sure she’ll join with Steve Webb in campaigning for a better deal for those on the minimum wage.

So do I.


The net pay dilemma (pt 94)

When the history of HMRC and the Treasury’s pension policy comes to be written, the net-pay scandal will be writ in black type as one of its darkest hours,

How can 300,000 people be auto-enrolled into workplace pensions on a promise of a 3% contribution from the boss and a 1% top-up from the Government, only to be told that the 1% never turned up because their employer used the wrong kind of pension contribution? It makes special pleading about the wrong kind of snow look rational!

HMRC continue to pass the buck to tPR who pass it back to HMRC (this actually happened last week in front of a live audience at Reward Strategy.

Then everyone blames operators (of DC trusts) for not moving to relief at source and nothing happens. In April 2018, the minimum contributions that will not get Government incentives double, by April 2019 they will have doubled again. NOTHING is happening – NOTHING.


Salary sacrifice +NET PAY    1+1 =3 ?

I commented in John Greenwood’s “on the money” article on salary sacrifice yesterday.

John picked up the comment which appears in later editions. He writes my words better than I can – so I hope you don’t mind me quoting myself directly from Corporate Adviser!

First Actuarial director Henry Tapper says: “Many of those on low earnings are not only unable to exchange salary for pensions, but unable to get the Government Incentive – basic rate tax relief – because they are in net pay schemes.

“Salary sacrifice/exchange gets round the net pay problem as all employees are treated equally – whether RAS or net-pay, tax-payers or below the income tax threshold.

“I would suggest that if it we were to make it easier for employers to offer salary-sacrifice to the low paid, we might go a great way to solving the net-pay problem.”

I was partly thinking of the (up to) 26.8% NI kicker – which mitigates the loss of the Government Incentive.

But I was also thinking that as soon as you get people thinking about the social consequences of denying the minimum waged the right to the NI kickers, you think about the Net-Pay scandal.


Pension tax credits

I am no expert on the HMRC’s capabilities but sorting this out does not look impossible. , It strikes me that anyone who chooses to sacrifice below minimum wage is special, if only for choosing to have a notional salary below minimum wage. Can we not make that election a trigger for  special treatment that puts money into people’s wage packet by way of a tax kicker from HMRC. For every pound sacrificed , could not HMRC put 20p onto the wage? Could we call this a pension tax credit?

Once you are sacrificing salary, the differences between RAS and net-pay are irrelevant. Everyone who sacrifices salary for pension in the nil-rate band should have the Government incentive of 20p in the pound paid on top of net salary as a pension tax credit.

I hope I am not being fanciful. The double impact of an NI kicker into the pension and a pension tax credit could incentivise pension contributions to the low-paid to the kind of levels enjoyed by the high-paid.

Though a word of caution has been uttered by Thomas Coughlan in his comment on this article

This might help low earners, but it wouldn’t help really low earners. If salary below the NI primary / secondary threshold (£8,164 per annum) is reduced there is zero benefit. So, whilst eliminating the NMW barrier might help those earning between £8,164 and about £14,500 (annualised NMW), it wouldn’t help those earning less than this.

This coupled with no income tax benefit via salary exchange for those earning less than £11,500, and I’m not sure getting rid of the NMW barrier would be that beneficial. Much better for low earners to pay to relief-at-source personal pension and get 20% income tax relief.

 

All this is food for thought for employers operating net-pay schemes. If I were running a net-pay scheme I’d be putting the risk of a class action from low-paid employers on my risk register. That’s when they find out just how much they are losing out on at the moment (both from being denied the NI and the tax incentives that are available to others).

There seems to be some social justice here. There seems to be some commercial risk-management too. But most of all, there is an opportunity here to get the low-paid to a point where they have decent sized pension pots – a whole lot quicker.t

Whether tweaking the rules for a workplace pension is the answer, whether LISA is the answer or whether there is merit in Alan Chaplin’s suggestion , I don’t know.

Looked at the Help to Save scheme today – https://www.gov.uk/government/publications/help-to-save-what-it-is-and-who-its-for/the-help-to-save-scheme.

Looks better than pension to me for anyone eligible… For those eligible but unable to afford maximum contributions, maybe employer can top up instead of paying pension contributions. At the end of the saving period, take the money and put into pension and get another 25% “bonus” in tax relief??

One thing’s for sure, something had better change about the way we deal with low paid worker’s pension rights and the incentives attaching.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in accountants, actuaries, advice gap, pensions and tagged , , , , , , . Bookmark the permalink.

15 Responses to Salary Sacrifice – a foot in the door for the poorly pensioned?

  1. alan chaplin says:

    Agree with all your points and they make sense. Ideally gov would look at reliefs, decide what to offer and make available to all simply – it really makes no sense that what you get depends on the type of wrapper others have chosen for your pension. That seems too big a task for gov to tackle but net pay and salary sacrifice available to all are wrinkles that can easily be removed.

    When considering low earners, don’t forget benefit system impact… for some people there is no incentive that makes pension attractive as they are taxed at 100% when they take it out.

    Like

  2. Adrian Boulding says:

    I’m quite happy if people want to tell me I’m wrong, but I think putting someone who earns below £11500 and is in a RAS pension scheme into salary sacrifice hurts them as it denies them the 20% tax relief they get with RAS.

    Ignoring NI at the moment, they pay in 0.8% of their QE from their take home pay and government add another 0.2% bringing them to 1%. Under Salary Sacrifice their employer would pay an extra 1%, they would get 1% less gross pay, which as a non taxpayer gives them 1% less take home.

    So extending salary sacrifice to the non tax paying low paid does not solve the net pay problem, it just disadvantages them in the same way that net pay schemes do today

    Agreed they might get 12% NI benefit, but at my card table the 20% tax relief trumps the 12% NI.

    Sadly I don’t think it’s as simple as an addition to a tax code. Because tax codes just increase the amount you can earn tax free, so if all your earnings are already tax free the higher tax code doesn’t do anything

    Where I do agree with Henry is that we need HMRC to step up to the plate and solve this issue. Since the advent of RTI, all the information needed to give non tax payers the extra 20% they are missing out on in net pay schemes is sitting on HMRC’s computer system. They just don’t want to add the necessary clause to the next Finance Bill and do the necessary computer programming!

    One of my publicity shy employers has pressed the Government on this on their Budget submission, but will they be listened to???

    Adrian

    Liked by 1 person

    • Mike Lacey says:

      Another reason I don’t particularly like RAS schemes. Although many pretend not to see it, ity is actually an indirect sex discrimination issue, akin to the Coloroll case: most part time / lower waged employees are female. Putting a workforce into a scheme that does not boost their contributions by 25% ( yes, 25%) is in effect discriminating against them.. They’re worse off! Ros Altmann has rightly been championing this issue.

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    • henry tapper says:

      You’re right Adrian – both about the problems of losing incentives for low-earners who salary sacrifice and that putting up the tax threshold is a pointless exercise for those who are below it. What I have in mind is a simple way of crediting people’s pay with the incentive – if they are sacrificing as a non-tax payer. The point is the same whether the scheme is RAS or net pay. It makes no difference what your contribution relief is – if you aren’t making contributions.

      If we are serious about pensions inequality, this whole mess at the bottom is where we need to start. Unless we get radical changes in the Autumn Statement, the problems we have now will simply escalate in April 18 and 19. The issues are conflating and it must be within the capacity of HMRC to put this right.

      Liked by 1 person

  3. Mike Lacey says:

    One of the reasons I don’t like salary exchange for the lower paid is the impact it has in some State benefits – maternity pay and sick pay. They’re based on income so any reduction in income will lead to lower State benefits.

    Reducing income below the NIC threshold will impact on Basic State Pension. And if you want a mortgage, guess what the lender will be looking at?

    Tread carefully.

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  4. Doug Mullen says:

    I think that Kate overstates the risk of bad publicity for implementing your suggestion. If NMW rules change so that salary sacrifice in the way that you suggest doesn’t breach NMW rules, then there won’t be the bad publicity. What I think will be more challenging for employers is adding further complexity to already complex rules on assessing whether NMW has been paid – so a simple way of confirming compliance in these circumstances would be necessary. That said, some simplification of the NMW rules more generally would be welcome – given that not even HMRC can properly interpret them without help!

    Liked by 1 person

  5. Thomas Coughlan says:

    This might help low earners, but it wouldn’t help really low earners. If salary below the NI primary / secondary threshold (£8,164 per annum) is reduced there is zero benefit. So, whilst eliminating the NMW barrier might help those earning between £8,164 and about £14,500 (annualised NMW), it wouldn’t help those earning less than this.

    This coupled with no income tax benefit via salary exchange for those earning less than £11,500, and I’m not sure getting rid of the NMW barrier would be that beneficial. Much better for low earners to pay to relief-at-source personal pension and get 20% income tax relief.

    Or is LISA the solution?

    Liked by 1 person

  6. Alan Chaplin says:

    Came across the Help to Save scheme today – https://www.gov.uk/government/publications/help-to-save-what-it-is-and-who-its-for/the-help-to-save-scheme.

    Looks better than pension to me for anyone eligible… For those eligible but unable to afford maximum contributions, maybe employer can top up instead of paying pension contributions. At the end of the saving period, take the money and put into pension and get another 25% “bonus” in tax relief??

    Liked by 1 person

  7. John Mather says:

    This is very old news salary sacrifice is just very simple obvious book keeping and where advice pays for itself

    Why not factor this into effective costs and why not make a complaint against those who have missed this point in the past

    Liked by 1 person

    • Mike Lacey says:

      I’ve outlined above why it’s not right for everyone: in short, it affects entitlement to some earnings related State Benefits, can impact on the amount of mortgage a lender might advance.

      Like

      • John Mather says:

        Clearly there are situations where arguments can be made for no action based on the denial or damage to the state aid provisions. In the extreme case providing a private pension at all can damage future entitlement to benefits but would we really advise not to save so as to have the State provide?

        I do worry about the assumption of the immortality of the corporate sponsor and how this is largely ignored in asssing the security funding provision

        Abstract
        The firm is a fundamental economic unit of contemporary human societies. Studies on the general quantitative and statistical character of firms have produced mixed results regarding their lifespans and mortality. We examine a comprehensive database of more than 25 000 publicly traded North American companies, from 1950 to 2009, to derive the statistics of firm lifespans. Based on detailed survival analysis, we show that the mortality of publicly traded companies manifests an approximately constant hazard rate over long periods of observation. This regularity indicates that mortality rates are independent of a company’s age. We show that the typical half-life of a publicly traded company is about a decade, regardless of business sector. Our results shed new light on the dynamics of births and deaths of publicly traded companies and identify some of the necessary ingredients of a general theory of firms.

        http://rsif.royalsocietypublishing.org/content/12/106/20150120

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  8. henry tapper says:

    John , Steve Webb is calling for something new. The comments above suggest that there is a lot of interest in getting incentives right – especially for the kind of people who can’t get the help you offer. Be kind!

    Liked by 1 person

  9. Harry Lime says:

    No argument against the general thrust of your post, but your first paragraph comes off as political polemic rather than something balanced.

    Pension tax relief — and it is actually _deferral_ and not really “relief” at all for the most part — only appears superficially to be “heavily weighted in favour of the have’s” because of symmetry. A steeply progressive tax system, with marginal rates of over 60%, is heavily weighted _against_ these same people, so pension saving merely restores some balance.

    Liked by 1 person

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