The The first Conservative Budget in 19 years was awaited with much interest, with many political commentators saying this one would be the one that George Osborne would want to be remembered for.
So did it live up to the hype? Did the earth shake and the ground move? Well the answer is not really, on the Richter scale it would probably be measured at a 5. Enough for most people to notice but not enough to change our lives radically. It felt a bit like a Coalition Budget in some ways, the minimum wage being a stand out example, but in other ways it was purely Conservative, with the raising of the Inheritance Tax to £1 million typifying Tory ambitions.
Radical for me would have been pushing ahead with the abolition of NI in favour of one Income Tax or giving tax relief to employers to promote financial education in the work place. So, there is still plenty of opportunity for George in his several Budgets over the full term of this Government...we won’t hold our breath here at Thomsons! The good news about NI not being abolished is that salary sacrifice has a stay of execution, at least for now.
There was of course some action that is worth noting.
The projected corporation tax rate of 18% in 2020 makes us one of the lowest tax regimes for business anywhere in the world. When you bear in mind that the rate was 28% in 2010 this is a remarkable transformation. Of course there is no gain without pain, and the little mentioned or predicted hike in insurance premium tax (IPT) from 6% to 9.5% is huge. Granted it only affects those employers who offer certain forms of insurance, such as travel or private medical insurance, but it was not that long ago that it didn’t exist at all.
Also, I loved the increase in the minimum wage to a living wage of £9 by 2020, which coincides with a million more jobs. Putting this together with a move to make sure benefits are only paid to the deserving, I think the budget is well balanced and addresses many of the promises made in the General Election campaign.
However I do have one big gripe. The key worry for most HR professionals will now be how to compensate higher earners who only a short time ago could have contributed 100% of £255,000 into their pensions. From next year these people will see the maximum amount that can be paid in with tax relief slashed to £10,000. I have to say that I find the assumption that high earners are better savers ridiculous. People earning over £150,000 are, of course, in the vast minority, however a poor pension saver is a poor pension saver, irrelevant of how much money they do or don’t earn.
There are two personal examples I want to give you. My late father was the UK MD of a large City business in the old days when you could cash in whatever pension you had when you moved jobs, so he did – he was a very poor pension saver. He would have been classified as a big earner in the scope of this proposed change from George Osborne. He retired on a pension of £26 a year from Abbey Life.
On the other hand, my in-laws, Dot and Malcolm, understood the importance of saving for a rainy day – so they did. After long working lives in the Standard Fireworks factory in Huddersfield, they both retired on handsome pensions enabling them to have as many holidays as they wanted. Some 20 years later, in their early 80’s, they are having a whale of a time still. My point is that I believe that there is still a massive requirement to educate and engage employees with their pensions so everyone ends up like Dot and Malcolm and not like my dear old dad. George Osborne has missed the point here.
So gripe over, let’s now look at the nitty gritty of some changes which will affect your businesses and your employees potentially.
1. Tax & Welfare Cuts
a) Insurance Premium Tax Standard Rate
From November 2015, the standard rate of insurance premium tax (IPT) will increase from 6% to 9.5%. From this date all premiums received by insurers using the IPT cash accounting scheme will be charged at 9.5%.
This change follows the previous increase from 5% to 6% in 2011, which at the time a number of insurers absorbed within their premiums. This reduced the impact on clients and their employees. With this budget’s increase of 3.5% it is unlikely that the same will happen this time round as the impact on the insurers will be sizeable.
The wording of this part of the budget changes implies that the increase will happen automatically, irrespective of a policy renewal date. This means that clients with benefits subject to IPT will see their benefit bill increase overnight. We will of course be contacting all providers to establish the approach they are taking, ensuring that we share this with you once the providers have had the chance to digest this news.
The benefits that IPT applies to are Private Medical Insurance, Dental Insurance, Cash Plans, Business Travel Insurance and Personal Accident Insurance. This means that for a number of clients the impact of this announcement could be sizeable and in most cases unavoidable. The one exception to this is Private Medical Insurance, where depending on scheme size and insured population, a trust arrangement which does not attract IPT may be an alternative.
If you wish to discuss the likely impact of this change, and the options available to you, please speak to your Thomsons Health & Wellbeing Consultant.
b) Inheritance tax allowance increased
A new transferrable nil rate band will be introduced to Inheritance Tax legislation from April 2017, that will apply to the main residence of the deceased. The allowance will be £100,000 from 2017/18, incrementally rising to £175,000 by 2020/21. This ultimately increases the Inheritance Tax allowance to £500,000 from April 2020, which when transferred to a spouse will total £1m.
There will also be a tapered withdrawal of this allowance on residences valued over £2m.
By introducing this new element to the IHT allowance, the Government intend to remove up to 26,000 estates from being liable to any form of Inheritance Tax. It will mean that those people who already have some form of estate planning in place may be able to reduce their life assurance premium, maybe giving them up altogether.
c) Changes to income tax thresholds
The point at which people start to pay higher rate income tax will be increased from £42,385 to £43,000 per annum. This means that an extra 130,000 earners will only pay basic rate tax on their total income. This is coupled with an increase of the personal allowance from £10,600 (set in the May 2015 Budget) to £11,000.
These proposals are the first step towards the Government goals of a £12,500 personal allowance and £50,000 higher rate threshold by the end of this parliament.
This is very welcome news for the vast majority of the population. Ultimately, it means that the average person will take home approximately £140 extra per year. Increasing disposable income for low/medium earners may be a shot in the arm for the economy.
Extra disposable income can often be swallowed up in household expenses, but it can be an important time to review employee benefits. Increasing valuable benefits such as pension contributions or life assurance premiums are far easier when take-home pay has just increased.
With several employees having been automatically enrolled into their pension scheme it may be a good time to review these minimum contributions and see what extra benefits they can gain by increasing their own contribution.
2. Salary Sacrifice & Pensions
From April 2016, the Annual Allowance will be gradually reduced for people earning over £150,000 per annum, from the current allowance of £40,000 down to just £10,000 for those earning £210,000 or more.
These proposals come on the back of the reduced Lifetime Allowance (also to come into force from April 2016) announced in the May 2015 Budget and will be another nail in the coffin of pension saving for the highest earners. Of primary concern though is that many of these people will be contributing above this limit at the moment (£10,000 is just 4.8% of a £210,000 salary), so will need to review these contributions immediately.
It is likely that reducing their employer contributions will be more advantageous, given that they will receive direct tax relief on their own contributions. So, working out where this extra benefit can be paid, while retaining the tax advantage of pension contributions, is going to be a major problem for employees, company and the benefits industry alike.
There is already a greater range of workplace savings plans available to the market, however with workplace ISAs unable to receive employer contributions, the industry will need to be creative in how it deals with these problems.
If this is something you think is going to affect you or your employees please speak to your Thomsons Pension Consultant.
b) Salary Sacrifice
Despite there being a lot of rumours and hearsay around the potential changes to salary sacrifice (or more likely, the removal of certain tax savings from employees and employers alike), there has been no change.
This is as we expected – it would have been a step too far, too soon, after the radicalisation of retirement planning through auto-enrolement, as well as the changes that allow pension access rather than mandatory annuity purchases.
Reducing or removing salary sacrifice tax breaks would in effect see employees’ net pay reduce, making retirement saving and buying certain benefits more expensive. The costs of benefits are already increasing in one way through the climb in Insurance Premium Tax and, as above, this will impact both employee and employer.
c) Pension Green Paper
The Chancellor announced that he will be publishing a green paper, laying out his proposals to merge the various legislations around pensions and ISA’s, which will be open to consultation.
With little or no content to this announcement it is difficult to know exactly what this will mean for the industry and more importantly the public. There is already conjecture that this might spell the end of pension tax relief and that all benefits from a pension (and not just the current 25% maximum) will be paid tax free, thus moving the relief from the front end to the back, mirroring the system under ISA’s.
Once published, this will still need to be ratified by parliament so is unlikely to be put into practice until 2016/17 at the earliest.