Every silver lining has a cloud…

In recent weeks there has been much media coverage of possible pension announcements by The Chancellor in the forthcoming March Budget. Our followers will be aware that a review of the tax relief system for pension savings was announced in the July 2015 Budget statement, and the outcome of this is keenly awaited. Given that all UK employers must now offer a pension scheme, it is not overstating the position to say that the eventual outcome of this process will be of importance to every business establishment in the land.

So what has sparked the renewed commentary this week?

The Financial Times (FT) delivered a story suggesting that the likely outcome of the review would be a flat rate of tax relief for all savers. It should be noted that the FT has recently had a good track record regarding initiatives in this space, which suggests their sources are keeping them well informed. That said, the publication has not predicted every recent major change, so there is no reason to take this story as read.

But, for the moment, let us take this story at face value. If the Chancellor does opt to follow this route it will be significantly less controversial (particularly with the wider UK electorate) than the proposed removal of all initial tax relief suggested in July 2015. It will also go some way to redress an imbalance that benefits higher-paid savers over the low paid. Crucially, it will ensure that a valid financial incentive remains to encourage continued saving in pensions.

So, if true, this would appear to be a rather positive story for all concerned. Yet every silver lining has a cloud.

From George Osborne’s point of view the above proposal would not produce as much immediate financial return to the Treasury as the more radical ISA option. This is a problem for the Chancellor given that many revenue making options were restricted by Conservative election promises, and the need to remove the deficit during the term of this government.

So – even if the flat rate option is selected – then it’s possible that there may yet be a sting in the Chancellor’s speech. This could quite easily manifest itself as an attack on the use of Salary Sacrifice in the provision of employee benefits.

As we have covered on this blog before, recent Budget documents have made it clear that the Treasury are concerned by the growth of this mechanism, and are monitoring usage with a view to possible restrictions down the line. Salary Sacrifice is much less well understood by the media and electorate than pension tax relief – and therefore perhaps a less controversial way of raising the revenue needed by the Treasury. If this were to happen then the impact would be felt across a much wider scope of employee benefit provision.

The bottom line is that we just don’t know what will come out of the Budget statement at this time – and it seems likely that a final decision has yet to have been made. But whatever the outcomes of this review, there is likely to be significant additional work, and indeed possible costs, to UK employers.

This is of course a subject we will return to at the time of the Budget itself.

For the full original article and other similar posts, please visit the Jelf Group blog.