The budget on 3rd March saw the Chancellor focus on the pressing need to support businesses in dealing with the consequences of successive lockdowns, while at the same time taking the first steps toward paying down the national debt.
While a cautious approach to loading the nation with higher taxation will be welcomed by many there were changes announced that will increase taxation by “stealth” and an indication of further changes to come.
Support for business impacted by Lockdowns
A raft of help, most notably the extension of the furlough scheme, and targeted help for those sectors most impacted by lockdown, were announced. Recognising that profitable businesses, economic growth and people in jobs are essential to the national recovery.
The roadmap of support laid out by government provided employers with certainty around the support available as they manage their business back to normal.
Balancing the budget
The majority of tax changes implemented were through a freeze to current rates or a deferral to the start date, a nod to the precarious position of some personal and corporate finances. The Chancellor decided 2021 was not the year to increase the tax burden on employees or their employers.
When we look at workplace benefits, the key change to come is the freeze on income tax thresholds from 2022/23. This will lead to more people paying tax, and those already paying tax paying more. It’s estimated that the freeze on the higher rate tax threshold will see a million more employees become higher rate tax payers by 2026 than would otherwise be the case.
When it comes to personal finances there was an immediate freeze on the threshold for Inheritance Tax, Capital Gains and the Lifetime Allowance for pension saving. While these changes won’t impact the majority of employees the freeze on threshold will gradually deliver more income for Treasury as the gap between what would have been the thresholds, and the post freeze thresholds grows.
If we look at the Lifetime Allowance for pension saving, this is the amount anyone can take out of a pension over their lifetime (plus the amount held at age 75) before they incur a charge, of up to 55%. The limit is supposed to increase in line with CPI but the freeze means that someone accessing a fund of more than £1,073,100 in a defined contribution pension scheme, or a pension of over £53,655 per year in a defined benefit scheme, will pay an additional tax charge of up to £3,190 in 2021/22. The amount will increase in future years.
There was a big change for businesses with the announcement that Corporation Tax will increase from 19% to 25% on 6th April 2023. While the new rate only applies to businesses posting annual profits of £250,000 or more, and those making £50,000 or less will stay on the 19% the Chancellor felt it necessary to implement the changes only after the economic recovery is anticipated to be complete.
Is there anything employers should do?
- With employees paying more tax, and more employees moving into the higher rate it’s worth remembering that deferring pay to retirement, by making pension contributions, means that most people will pay less tax. The 25% tax free cash sum, the personal allowance and the relatively small proportion of people who will have income of over £50,000 in retirement mean that most people will pay an effective rate of income tax of less than 15% on their pension benefits, if they take them after stopping work. Communications around the tax benefits of pension saving might be welcomed by employees.
- While only a small minority of employees will be impacted by the freeze in the lifetime allowance the impact is more likely to be on senior employees who’ve accrued substantial DB and/or DC pension entitlement. If you’re looking at alternative benefits for these employees you might wish to consider wider workplace saving products. A workplace ISA or Investment Account can provide a convenient and valuable benefit. Teamed with financial education or advice it can ensure senior employees make full use of alternative tax efficient saving opportunities.
To limit the impact of corporation tax increases on net profits you could look at what you’re spending money on, and whether you can deliver similar employee benefits more cost effectively. This could include:
- Investigating salary sacrifice for employee pension contributions. This would reduce employer (and employee) NICs costs.
- Looking at how you provide your company pension scheme. If this is provided through your own occupational pension scheme, could a similar benefit be provided more cost effectively through a master trust, a group personal pension? If your pension scheme is unbundled are there any opportunities to utilise a provider’s bundled investment and administration proposition?
- Reviewing the provider of benefits like life cover or your company’s general insurance provision to see if you can obtain better value in the market.
As with any changes to employee benefits we’d strongly advise employers to take professional advice before making any change to the benefits you provide to your employees, who provides them, or how they’re provided, but if you think Aviva might be able to help you, please let us know.
Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.