Pension 25% Cash Free Lump Sum .... Last chance saloon?

[jamesbrown]

I think the killer for contractors and umbrella workers alike would be payment of employer's NI on pension contributions. Hopefully the public sector impact of this is so great that they'll avoid this one and just put through a small increase in ER NI.

Based on the recent coverage, this is pretty much dialed in, ErNI on pension contributions, but we'll see. In terms of NHS consultants etc., re-introducing the LTA would be a bigger deal for them, which is why that won't happen.

[mogga71]

Many people will have multiple pension pots, from various employments.
Subject to the maximum allowed (based on the old lifetime allowance) one can currently take 25% per pot tax free.

My understanding is that one can put a SIPP into drawdown, taking 25% tax free, not touching the 75% remaining (which is left to grow), and continue to contribute to another pension pot from which 25% tax free can be taken at a later date. This is in the same way as one can put a proportion of a SIPP into drawdown - it's not necessary to put all in to drawdown at once. Key is not to trigger the reduction in MPAA.

Of course, increasing the amount paid in, after taking the 25% exposes one to questions of re-cycling and a potentially stressful debate that most would seek to avoid.

I think the killer for contractors and umbrella workers alike would be payment of employer's NI on pension contributions. Hopefully the public sector impact of this is so great that they'll avoid this one and just put through a small increase in ER NI.

Yip that is correct. You can have multiple pension pots and the 25% rule applies to each of the pension pots individually. Sounds good in theory but you also have the hassle of managing multiple pensions and charges etc. I purposely moved all 3 of mine in to one SIPP a few years back to make life easier.

[mogga71]

Based on the recent coverage, this is pretty much dialed in, ErNI on pension contributions, but we'll see. In terms of NHS consultants etc., re-introducing the LTA would be a bigger deal for them, which is why that won't happen.

Forgive me if I have misunderstood this but what does 'ErNI on pension contributions' actually mean though in real world terms? Presently you can use salary sacrifice and put £60k in a SIPP each year.... therein not paying any deductions at all (eg. Employer NI, Employee NI). Are we saying that the Employer NI element would change ... but where would that change manifest itself in Salary Sacrifice?

The biggest concern for most Outside contractors must surely be raising Employer NI full stop as the 'ErNI on pension contributions' is only applicable for contractors making pension contributions. Raising Employer NI means an unavoidable dent in all contractors pay (especially those Outside).

[malvolio]

Yip that is correct. You can have multiple pension pots and the 25% rule applies to each of the pension pots individually. Sounds good in theory but you also have the hassle of managing multiple pensions and charges etc. I purposely moved all 3 of mine in to one SIPP a few years back to make life easier.

Don't quite see the logic here; 3*25% of 10,000 is the same as 25% of 30,000. Yes it's easier to manage (which is why I did the same thing).

Of course you may be able to get 25% of whatever extra the fund earns from the addition of a different 25%, but the gains aren't likely to be significant for most people.

ErNICs on pension savings is rather more significant. It is unlikely to be set up as a zero sum game by HMT, and it's quite possible you ill be looking at a bill of 13.8% (or whatever the new rate is) on your payment. It is also being mooted than the NIC exemption of pension age earner will be dropped, making a big dent in your pension earnings.

We will just have to wait a couple of weeks to see whatever the actual answer is. Reeves may actually realise the likely damage she may be about to cause...

[escapeUK]

The biggest concern for most Outside contractors must surely be raising Employer NI full stop as the 'ErNI on pension contributions' is only applicable for contractors making pension contributions. Raising Employer NI means an unavoidable dent in all contractors pay (especially those Outside).

Why do you think those of us outside pay much employer NI? I only pay it on the difference between the primary and secondary threshold as it works out currently very slightly cheaper than corp tax. If they raised it so this was no longer the best way I would drop my salary to the secondary threshold and pay zero, which is how I was doing it for over a decade.

I am more concerned about dividend tax increases.

I found this image useful:

[Protagoras]

Don't quite see the logic here; 3*25% of 10,000 is the same as 25% of 30,000. Yes it's easier to manage (which is why I did the same thing).

Of course you may be able to get 25% of whatever extra the fund earns from the addition of a different 25%, but the gains aren't likely to be significant for most people.

ErNICs on pension savings is rather more significant. It is unlikely to be set up as a zero sum game by HMT, and it's quite possible you ill be looking at a bill of 13.8% (or whatever the new rate is) on your payment. It is also being mooted than the NIC exemption of pension age earner will be dropped, making a big dent in your pension earnings.

I think the point of the multiple pots is in the timing.
e.g. one could take £25k from a £100k pot now (assuming age over 55) and leave the £75k to grow AND also continue to put up to £60k p.a. into another pot and take 25% of the value of that pot tax free at some future date.
This looks pretty generous for those who can afford such payments, so it's hardly surprising that a reduction in the tax-free limit is rumoured.

ErNIC on pension contributions, looking at numbers.
Someone putting £60k in a pension pot (from gross income) who as a retiree would be a 20% tax payer would get £15k tax free and pay £9k tax on the remaining £45k, giving an overall tax rate of 15%.
Losing 13.8% to ErNIC on the way in, £8.3k is paid up front in ErNI, so the total tax paid (again for a 20% rate retiree) is just over £16k.
It's a huge rise, and would clearly disincentivise pension savings.

[jamesbrown]

Forgive me if I have misunderstood this but what does 'ErNI on pension contributions' actually mean though in real world terms? Presently you can use salary sacrifice and put £60k in a SIPP each year.... therein not paying any deductions at all (eg. Employer NI, Employee NI). Are we saying that the Employer NI element would change ... but where would that change manifest itself in Salary Sacrifice?

The biggest concern for most Outside contractors must surely be raising Employer NI full stop as the 'ErNI on pension contributions' is only applicable for contractors making pension contributions. Raising Employer NI means an unavoidable dent in all contractors pay (especially those Outside).

It means that employers will pay ErNI on employer contributions to registered pension schemes. In other words, the tax benefits of employer pension contributions just took a nose dive. If you’re working through an umbrella, the full costs of employment are levied on your income, so a general increase in ErNI would be bad too, yes, but salary sacrifice just became a lot less attractive and this was pretty much the last opportunity for tax planning enjoyed by umbrella workers. For those of us working outside IR35, the benefits of employer pension contributions likewise took a hit.

[escapeUK]

The trouble with most leftie ideas is they do not consider consequences of them. The reason people get tax benefits to pension contributions is because its better for the state that people do not need to depend on them when they are old. So the ramp outside the bungalow, home help etc is paid out of the pensioners money and not the councils.

Since they are making noises about means testing the state pension (the audacity of that idea), and then tax the money going into a pension making it even worse. People will look at off the books ways of keeping wealth for retirement. For example gold coins, attract zero tax, and would be invisible for any means testing. A win win for the person and a lose lose for the state.

[gables]

It means that employers will pay ErNI on employer contributions to registered pension schemes. In other words, the tax benefits of employer pension contributions just took a nose dive. If you’re working through an umbrella, the full costs of employment are levied on your income, so a general increase in ErNI would be bad too, yes, but salary sacrifice just became a lot less attractive and this was pretty much the last opportunity for tax planning enjoyed by umbrella workers. For those of us working outside IR35, the benefits of employer pension contributions likewise took a hit.

As an umbrella worker I get how a general increase in ErNI affects the overall income and what is left to distribute via paye salary and pension, but lets say the worker is currently paying £2k as salary sacrifice and they continue to pay £2k surely all that goes into the pension.

[jamesbrown]

As an umbrella worker I get how a general increase in ErNI affects the overall income and what is left to distribute via paye salary and pension, but lets say the worker is currently paying £2k as salary sacrifice and they continue to pay £2k surely all that goes into the pension.

Where do you think the 13.8% ErNI on that amount is going to come from? It's coming from the same place the rest of the ErNI, AL and every other tax is coming from...