Experts expect headline news on pensions, salary sacrifice and immigration
When Chancellor George Osborne takes to the floor this Wednesday (16 March), a left-field surprise to rival the national living wage is considered unlikely. But while he may usher in changes to fuel duty, capital gains tax and even the price of a pint, many of Osborne’s most important announcements are set to affect HR professionals directly – with a 1 per cent drop in tax income forecast, he is expected to cast the net wide in his search for savings. People Management asked the experts what’s likely to be in store.
Pensions: tax changes
Most speculation over the past few months has centered on the potential for major changes to the amount and nature of tax relief available on employee pension contributions.
Currently, employers are not taxed on contributions to staff pension pots, as the pensions themselves are taxed when employees receive them in retirement. Osborne was expected to consider either reversing this process, potentially increasing tax revenue in the short term, or lowering the amount of tax relief available, particularly to higher earners, perhaps through the imposition of a flat rate.
But budget leaks over the past couple of weeks appear to suggest this has been all but ruled out. A ‘pension ISA’, which would give tax-free pension withdrawals for those over the age of 55, is also reportedly being taken off the table.
Debi O’Donovan, founder of the Reward & Employee Benefits Association, is among those who are relieved at the news: “Without tax breaks, many employers have told us they would not do more than the minimum required by auto-enrolment – there would be no incentive to. If a flat rate of tax relief is introduced for all earners, a great deal of work would be created, such as re-doing payroll calculations, among myriad other things.”
The tax-free limit of personal pension contributions was slashed from £50,000 to £40,000 per year in the 2014 budget. Further reductions are possible here, but O’Donovan is concerned that this would penalise individuals attempting to make up for not having saved enough to date. “For HR people, we’ve had so many changes to pensions, it is time to stop fiddling,” she says. “The government should let what we have bed down before they think about anything else.”
Salary sacrifice
They may not grab the attention of the headline-writers but, if salary sacrifice schemes were curtailed or even abolished, there would be profound implications not just for the way employers choose to engage and reward their staff, but also for the employee benefits industry, which has grown exponentially in recent years.
Salary sacrifice schemes allow employers to offer benefits such as increased pension contributions, gym memberships and childcare vouchers without paying employer national insurance contributions, which also lowers the overall cost to staff. There is a perception that their widespread use is costing the Exchequer an unexpectedly large amount. But if they were abolished, most staff would simply opt to take employee benefits as salary instead – with implications for the payroll as well as the psychological contract.
Tax relief
David Cameron promised cuts to income tax if he was elected as leader of a majority Conservative government. And despite the tricky fiscal environment, he may feel now is the time to deliver, with his chancellor reportedly considering raising the level at which people start paying the higher rate of tax.
The 40p income tax threshold is currently set at earnings above £42,385, and is due to rise to £43,000 from April before reaching £43,300 in 2017. But there has been speculation that this could be raised to as much as £50,000, or that the top rate of tax could fall to 40p from the current 45p.
Osborne is also reportedly examining a faster increase in the personal allowance, which is set to rise to £10,800 from April and £11,000 in 2017, before hitting £12,500 by 2020.
One other area he is likely to tackle is the use of personal service (or ‘umbrella’) companies, which allow many professionals to avoid national insurance on their earnings by declaring themselves self-employed. The government has already signalled its willingness to clamp down on these arrangements.
Apprentices
In last year’s summer budget, Osborne announced plans for a levy to help fund the government’s ambition of creating three million apprentices in England by 2020. In the autumn statement, he revealed that firms would pay 0.5 per cent of wage bills above £3 million, with the charges set to begin in 2017 and the first related apprenticeships delivered in 2018.
Further details may be forthcoming in this budget. The manufacturers' organisation, the EEF, is among those asking for specific conditions, including that the levy rate and allowance should be set for at least the four years that the average manufacturing apprenticeship lasts. It says levy funding must not be used for the creation or administration of the levy or its spin-offs.
Immigration
A referendum on Brexit is looming, which means migration is never far from the political agenda. Earlier this year, the independent Migration Advisory Committee urged the government to introduce a £1,000-per-year charge on employers for each member they recruit on a Tier 2 visa under the points-based system, which is the primary route for economic migration to the UK from outside the European Economic Area.
We may find out this week whether the government will accept this recommendation. Mark Beatson, chief economist at the CIPD, is among those warning that such an immigration skills charge would not be popular with employers, nor would it achieve its political aim of encouraging investment in young British talent: “Our surveys suggest that organisations that recruit migrants are already more likely to offer apprenticeships,” he says.
Additional reporting by Greg Pitcher