The summer Budget and its impact on employee benefits

Article Index
Overview


In the run up to their 2015 election win the Conservatives made it clear that they would not be increasing three of the key Treasury revenue producers (income tax, National Insurance and VAT) during the course of the current parliamentary term. Whilst the above was an eye-catching and possibly popular policy with the electorate, it did leave many commentators wondering where the income would come from to run the economy over the next five years. Well, wonder no longer, as the second instalment of George Osborne’s 2015 Budget suggests that much of the burden may be met by changes that impact employee benefits, and by extension the employers that sponsor the same.

Insurance Premium Tax

Although it did not receive that much coverage, an increase in the rate of Insurance Premium Tax (IPT) from the current 6% to 9.5% in November this year adds some real cost pressures for many employers.

IPT does what it says on the tin, being an additional levy on the insurance premium of many products. It follows that a 58% increase in IPT is bad news for any individual or company with insurance products. 

The impact on employee benefits will likely be felt most by those organisations that offer company-paid health insurance for their employees. Whilst a valuable and well received benefit, it is undeniable that the generally upwards cost pressures driven by insurer claims experience pose a regular headache to organisations that are keen to provide this benefit. A further hike in the cost as a result of taxation is probably the last thing that employers need right now.

As a result, it’s likely that many more employers will now actively be considering restructuring their healthcare cover to produce a more cost-effective outcome. Healthcare Trusts largely avoid the IPT issue altogether, and another option, known as Corporate Deductible, cleverly uses a voluntary excess to limit the insured content (and therefore the IPT also). Both options are likely to get much more oxygen over the coming years.

Tax-free Childcare

Tax Free Childcare (TFC) is the government initiative to support working parents with up to £2,000 of support per child, per year, and was due to become available this autumn (when it was set effectively to replace the existing Childcare Voucher system).

Yet behind the scenes a court case between some of the existing voucher providers and the Treasury has been taking place. The challenge from the providers was rather technical, and was directly related to the awarding of the administration of the new scheme to National Savings and Investments. The case was dismissed by the High Court on 1 July this year, and there are no longer any visible barriers to progressing TFC.

That said, it’s quite apparent that the government have seized upon the court case as a reason to delay the roll out of TFC. Although the action only generated around 9 months of delay, the government have used this to muddy the waters, and extend the TFC launch date to ‘early’ 2017. The probable reason for this extension is outlined in the supporting document to the summer Budget, which confirmed that HM Treasury will be £370 million better off as a result of this delay.

Meanwhile, the working parents that were hoping for this support will get no additional help. That said, the government have made it clear that the existing Childcare Voucher scheme will be retained until TFC is introduced, so this delay gives employers another chance to inform employees of the significant benefit inherent in Childcare Vouchers (more than £900 per parent, per year) – see also Tax-free childcare: a better option for employers? And employees that join Childcare Voucher schemes prior to the introduction of TFC will be able to retain their membership in the former if it is more beneficial for them to do so.

Pensions

Last, but far from least, is our old friend pensions.

As the employee benefit that receives the most support in tax reliefs (an estimated £30bn every year), pensions are a regular target of Treasury Budget planners, but historically have avoided the monetary axe by virtue of the counter-argument that the reliefs are necessary to ensure adequate pension membership and savings for the UK’s collective old age.

Yet this argument may have now been overtaken given that legislation requires all employees to become pension members automatically. Add to this the disproportionate level of tax reliefs which go to the wealthy, and there is a clear case in the mind of the Chancellor to consider reform here.

So what was announced? Broadly the announcements fell into three categories:

  • Restrictions for the very highest earners

In line with its manifesto commitments, the government will introduce a taper to the Annual Allowance (AA) for those with adjusted incomes, including their own and employer’s pension contributions, over £150,000. For every £2 of income over £150,000 the AA will be reduced by £1, down to a minimum of £10,000. This applies from April 2016.

This will prove problematical for only a few individuals (the Budget estimate less than 1% of savers), although as significant earners they may well merit special attention by the HR department. But in practice this issue may perhaps be overtaken by a much more significant announcement below.

  • Review of pension tax reliefs

In his speech the Chancellor announced, ‘Britain isn’t saving enough ... I am open to further radical change’, and then went on to say that ‘pensions could be taxed like ISAs’.

A green paper published the same day, Strengthening the Incentive to Save, outlines options that might be considered to ensure that the tax incentives inherent in pensions produce the best possible saving outcomes. A change as dramatic as pension relief levelled with ISAs is by no means a certain recommendation, but it would be surprising if the final options did not reflect a significant saving for the Treasury during the term of this Parliament. Other options that are also being considered include the removal of higher-rate relief or a levelling of the tax relief system for all.

Any such change would spark major problems for employers. Virtually all administration and communication activities (probably including auto-enrolment) would have to be reviewed and changed, and it’s even possible that employer pension contribution costs could increase as a result of the restructure. 

  • Salary sacrifice

The supporting Budget text includes the following paragraph:

‘Salary sacrifice arrangements can allow some employees and employers to reduce the income tax and National Insurance that they pay on remuneration. They are becoming increasingly popular and the cost to the taxpayer is rising. The government will actively monitor the growth of these schemes and their effect on tax receipts’.

Or to put it another way, this is costing the Treasury too much and they are keen to find a justification to end this practice. My reading of this is that if a change to pension tax reliefs mentioned above cannot be achieved, then the focus may instead turn to salary sacrifice.

Removing salary sacrifice would be difficult - but not impossible - and would save the Treasury huge sums. The flip side is that many employers utilise the savings inherent in the practice to offer a wide range of important benefits to their employees, and indeed subsidise the cost of same as well. It would therefore be likely that the removal of salary sacrifice could have a detrimental impact on the numbers of individuals who have adequate savings and protections in place.


The bottom line is that more very significant, but as yet uncertain, change lies just over the pensions horizon. However, with the current consultation set to finish in September, it is entirely likely that the Chancellor’s autumn statement will conclude the 2015 budgets with another major pensions announcement. The saga continues.


 

Add comment


Security code
Refresh





Forgotten your password?

 
I'd like to subscribe
Subscribers only - te law will answer your employment law queries. Find out more about our email support

Now there's more ways to stay in touch

Join Us on Linked in Become our Fan on Facebook Follow us on Twitter