Guide to Budget 2018: Impact on pensions

The Chancellor Philip Hammond delivered his last budget before Brexit on 29 October 2018.  Here we outline the major points affecting pensions.  It should be noted that the Spring statement could become a full fiscal Budget should circumstances (including the Brexit outcome) mean a change in financial situation requires it. The full guide to Budget 2018 can be opened here. 

Income Tax

Personal Allowance

The Personal Allowance will increase to £12,500 from April 2019, one year earlier than planned by the Government, and will remain at the same level in 2020/21. It will increase in line with the Consumer Prices Index (CPI) after 2020/21. 

This increase of £650 will, according to HM Treasury analysis, mean that in 2019/20 a typical basic rate taxpayer will pay £130 less tax than in 2018/19. This will help to ease the financial burden on employees when the minimum contributions for auto-enrolment are increased in April 2019. 

Further HMRC analysis also indicates that this increase in Personal Allowance will increase the number of tax payers taken out of income tax since 2015/16 to 1.74 million.  Whilst this would appear advantageous for those on a low income, it throws up other issues and anomalies in terms of tax relief given on pension contributions.See later section on the tax relief anomaly.

Higher Rate Tax Threshold

The higher rate tax threshold for England, Wales and Northern Ireland will also increase from April 2019 to £50,000, a year earlier than planned, and will remain at the same level in 2020/21. It will increase in line with CPI after 2020/21.  The Scottish parliament will set its own rates and bands for Scotland in the Scottish budget due on 12 December.

HMRC analysis indicates that this increase will result in nearly one million fewer higher rate taxpayers than in 2015/16. This in turn, will also affect the amount of tax relief given on pension savings for affected individuals, as tax relief is based on their highest marginal income tax rate of 20%, 40% or 45%. A reduction in tax relief (or Government top up) may result in some people choosing to pay less into their pension.

It is worth noting that the upper threshold for paying 12% Class 1 National Insurance Contributions (NICs) will also increase to £50,000 from £46,350 for 2019/20, meaning that affected employees will pay 12% NICs on an additional £3,650 of their earnings in 2019/20 instead of 2%. This will obviously offset any gain achieved by paying 20% income tax rather than 40% income tax on this part of their earnings.

Pensions Tax Relief

Possible changes to pensions tax relief is always a hot topic for speculation prior to any budget, however the Autumn budget delivered very little change. Rather than make any cuts to the pensions allowances in his budget, the Chancellor confirmed the following:

  • The lifetime allowance for pension savings will increase in line with CPI for 2019/20 to £1,055,000.This is an increase of £25,000 from the existing lifetime allowance of £1,030,000, and would lead to a saving in tax of £13,750 if taken as a lump sum, or £6,250 if taken as income (which would also be subject to PAYE).
  • The annual allowance will remain fixed at £40,000 for the next financial year, along with the money purchase annual allowance at £4,000 and the tapered annual allowance threshold at £150,000.

This absence of reform is in line with the statement delivered by the Government on 12 October 2018 to the Treasury Select Committee, in response to their suggestion that the Government return to the question of reform.  The Government stated that “no consensus for either incremental or more radical reform of pension tax relief has emerged since the [Strengthening the incentive to save: a consultation on pensions tax relief] consultation in 2015”.

How long this will continue to be the case is unknown, especially given the uncertainly around Brexit. For the next tax year at least, things currently look set to remain unchanged.

The National Living Wage (NLW) and National Minimum Wage (NMW)

  • The NLW will increase by 4.9% from £7.83 to £8.21 from April 2019
  • The NMW for all age bands, and apprentices, will also increase by varying amounts between 3.6% and 5.4%.

Whilst employers must obviously adhere to these new rates from April 2019, consideration should be given to their broader application.Employers operating a salary exchange (sacrifice) scheme must ensure that employees do not exchange salary to the extent that their earnings fall below these new minimum levels. 

When looking at salary exchange, employers also need to consider the increase in auto-enrolment pension contributions which apply from April 2019.This is because it may, depending upon the existing pension scheme contribution structure, result in an increase in the amount of salary being exchanged.The combination of these two changes means that a review of any salary exchange scheme for low paid workers is essential before April 2019.

This increase in NLW, in conjunction with the increase in Personal Allowance, will further ease the financial burden of the increase in minimum auto-enrolment contributions from April 2019 for those on a low income.

The Pensions Dashboard

The Budget confirmed that the Department for Work and Pensions (DWP) will consult later this year on the detailed design for Pensions Dashboards, and on how an industry-led approach could harness innovation while protecting consumers. The DWP will work closely with the pensions industry and financial technology firms.£5m of extra funding in 2019/20 has also been provided to help make the dashboards a reality. Documentation published alongside the Budget confirmed that the dashboard would also include the state pension. 

Pensions Cold Calling

The Government has published a response to its consultation on the regulations to ban pensions cold calling alongside the Budget.  It will shortly be implementing legislation to make pension cold calling illegal. 

The legislation, which must obtain parliamentary approval, will prohibit cold calling in relation to pensions unless the caller is authorised by the Financial Conduct Authority, or is the trustee or manager of an occupational or personal pension scheme, and:

  1. The recipient of the call consents to such calls being made by the caller on that line; or

  2. The recipient of the call has an existing client relationship with the caller, and the relationship is such that the recipient might reasonably envisage receiving pensions cold calls.

The ban also extends to cold calls when the initial purpose of the call is to discuss one topic, and a discussion about pensions is bolted on afterwards.The legislation allows for the Information Commissioner’s Office to issue civil monetary penalties of up to £500,000 for breaches of the regulations.

The Net Pay Anomaly

Conspicuous by its absence from the Budget, is any provision to deal with the anomaly that currently affects lower paid earners who are members of a net pay pension scheme.  This type of pension arrangement, which is common for occupational pension schemes and some master trusts, gives tax relief by deducting pension contributions from salary before tax is deducted.  This works well for employees who pay tax, as full tax relief is achieved straightaway.  However, for those employees who do not pay tax, no Government top up is received, which is in contrast to members of relief at source schemes, who automatically receive 20% basic rate tax relief on their pension contributions despite not paying any tax.

The People’s Pension director of policy, Gregg McClymont, said the Government has “missed the perfect opportunity to tackle the net-pay anomaly”.  He also commented that “It’s unsustainable for Government to automatically enrol millions of people into pensions and not ensure that the system works fairly on everyone’s behalf.”

Increasing the Personal Allowance by £650 from April 2019 will result in more employees who are in a net pay pension arrangement being captured by this anomaly.