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February 2018
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To the February edition of Tax Tips & MYOB News.

This month we focus on Workplace Pensions. We discuss the hidden exploitation behind the government’s scheme. We also look at increases to contribution rates and other proposed changes.

If you would like to find out more about our support for employers see our website.

February 2018
· Workplace Pensions: Vanity or Corruption?
·Our Simple Workplace Pension Scheme
· Future changes to Auto Enrolment
· February questions and answers
· February key tax dates
Workplace Pensions : Vanity or Corruption?
Auto Enrolment is the compulsory registration of workers, including relatively poorly paid workers, into a workplace pension scheme.  The current government is very proud of this scheme. But it has its origins in the last Labour government in their Pensions Act of 2008, which introduced the concept of auto enrolment. 

Over a million employers in the UK have been registered so far.  Since October all new employers have to start pension schemes immediately.  Most have little clue what they are doing, or why.

The Pensions Regulator (TPR) are issuing fines to encourage employers.  A failure to submit the Declaration of Compliance can lead to a one off fine of £400 followed by a daily escalating fine of £50 a day (for employers with 1-4 staff) and up to £10,000 a day (!!) for the largest employers.  You get one warning only.  TPR are also currently carrying out a programme of spot checks across the country. 

The internal administration for employers is complex.  Various notifications and statutory letters need to go to each employee.  Compulsory re-enrolment (every three years) is required for those staff that decide to leave. There
is considerable potential for complaints and distracting disputes between staff, employers, the pension schemes and TPR.  We have now started to come across clients of other firms that have been fined.

Complex Systems & Jargon
TPR’s support for the very smallest employers is unhelpful to the point of being counter productive.  Imagine that you are the carer of a disabled relative.  You need to employ someone to look after your relative while you go on holiday.  Would you go through the rigmarole available on the TPR website?  When they can’t even be sure of the definition of a worker?  Consider that so called ‘Eligible’ workers have to be autoenrolled but ‘Non eligible’ workers usually still have to be enrolled also.  Most strangely ‘Entitled’ workers are not entitled to employer contributions.  And employees can easily change status between these.

So if you set up as a new employer now, as soon as you employ someone, you have to immediately pay their pension contributions.  But this means that as soon as a new business sets up it will immediately have to consider which pension scheme it needs for its potential workers.  Is this really what the government wants our newest entrepreneurs to be concentrating on at the outset of their businesses? 

The systems are shocking.  The pension scheme portals don’t work very well.  Manual uploads are required from many payrolls to each pension provider.  The pension providers will bounce the text files through misapplication of error management checking.  Independent Financial Advisors are out selling middleware linking payrolls to the Pension Schemes and providing compliance letters. All this is expensive and provides no necessary functionality.  The cost of administering all this currently exceeds the amounts invested. 

Little Benefit to Low Paid Workers
Now all of this could be excused if there were a significant benefit.  But for many employees the pension scheme that they are paying into will actually be counter productive.  Low rates of returns on investments, marginal tax savings, and low contribution rates may give employees only the illusion that they are saving for their future.  In fact they will be saving relatively modest amounts of money to allow the government to reduce the means-tested benefits that they would otherwise be entitled to once they become pensioners.  The scheme doesn’t actually make financial sense to a poorly paid worker. 

From April 2018, those earning as little as £6,032pa.can choose to opt into an Auto Enrolment scheme.  This is a very low threshold – so low that the worker hasn’t even paid tax yet.  And employees haven’t had to have earn the actual threshold before they have registered.  Even this low threshold is under threat as the government considers forcing deductions from the first pound of all earnings of all workers.

The extra contributions taken from workers and employers combined are going to eventually be paid to pensioners.  But since minimal pension investments will only offset state benefits all that has really happened is an increase in tax. 

Employer NI of 12.8% is still assessed on the gross wages of those making employee contributions.  Greater employee pension contributions therefore means more tax for the government. 

The standard ‘Relief at Source’ tax scheme
Under the standard ‘Relief at Source’ scheme, income tax is deducted from the contribution at a uniform 20%. 
The contribution then gets a 20% tax rebate received to the Pension Scheme. Anyone who is a 40% taxpayer who is making employee contribution is likely to get penalised by this.  Who gets the missing 20%?  The HMRC.  The only way to get the full 40% rebate right is to complete a tax return.  All this is down to the nature of the contribution.

Employers are responsible for choosing the pension scheme.  Our practice recommends against the state-sponsored NEST scheme, which only offers ‘Relief at source’.  Our preferred pension scheme, The Peoples Pension allows the alternative ‘Net Pay’ tax relief, which rectifies some of the tax disadvantages of employee contributions.

Not such a good Investment
The long term effects are more serious.  Even the 8% of pensionable contribution due from March 2019 is very small.  Typical large superannuation schemes now require over 25% between the employer and employee.  The Universities Superannuation Scheme, for example, totals 26% – 18% from the employer and the rest from the employee.  The 8% of pensionable earnings payable under auto enrolment is too high for the poorest workers, but too low to do anything more than give workers the impression that they are saving for their pension.  In fact often all the employee is doing is borrowing now to save for the future at unimpressive interest rates.  The scheme is therefore a deception. 

Auto Enrolment  creates bureaucratic stiffness within businesses as it makes it difficult to switch between providers of payroll, pension and accountancy services.  This means that small businesses face further deterrent to employing people.  It will act as an inducement to employ people on a false self employment and contribute to the grey economy.

This will create also a move of investment capital up from the smallest businesses, and from the voluntary sector, up to the City.  There it will be invested in the UK’s largest companies.  Senior business managers will be paid well from the wage deductions taken from the poorest of Britain’s workers.  And all each worker will get is a link by email and password to see their AE account – but this is locked away from them until they retire. 

Ministers are so pleased with themselves they are now planning to extend contributions to all workers, even teenagers, and make larger charges from the very first pound of earnings.Their sponsors in the city will be delighted.

Much is made of the idea that the ‘employer pays too’.  But this is a distraction.  The employers pay the gross cost of the wages but they also pay employer NI on employee contributions.  The most benevolent of employers will also pick up the cost of the pension contributions to make sure that an employee’s net cash received doesn’t fall. 

A new Employment Tax
Effectively Workplace pensions act as a new employment tax.  The 8% eventual pension rate will act on top of Employer NI of 13.8%, Employee NI of 12% ,
Student Loan (for some) of 9%, and PAYE 20%/40%.  These deductions pile up.  What happens if an employer wants to pay a bonus to a median paid worker subject to all these withdrawals?  Median UK earnings are currently about £28k and have been falling in real terms for over a decade.  Say an employer is willing to pay a bonus at a cost of £1000.  After all the deductions the employee will only end up with £484 of actual cash in their wages.  The effective tax rate for this median worker has therefore become 51.5%.   

Youth are going to be the principal losers.  Rather than be given discretion about how they are to plan for their future and pension age, the older generation has taken the decision for them.  The government has decided to put the funds of the young into the same system that has already failed the old.  The high tax rates are financially inducing youth to drop out, to keep their earnings low or emigrate. 

And in hurting the most technically aware tranche of our nation’s workforce, the government, along with the Labour opposition that founded the scheme, have done us a disservice.

Our Simple Workplace Pension Scheme
Future Changes to Auto Enrolment
In the article above we discuss the failings of the Pensions Regulator (TPR)’s Workplace Pension Initiative.

To offset some of the problems we are offering a very simple standard scheme to our clients. 
  • We  recommend The Peoples Pension.  They offer the best customer service support and a straightforward client portal. Also (unlike NEST) they allow Net Pay tax deductions (no tax is taken off contributions).
  • The minimum contribution rates (5% from April 2018) will all be paid by the employer.  They are not split between employer and employee.
  • If an employee wishes to make Additional Voluntary Contributions they can arrange it directly with the pension scheme. Employers can also make additional contributions if they wish.
  • Contribution rates are calculated on ‘Banded Qualifying Earnings’ only: currently the band of earnings between £490 and £3,750 per month. The earnings considered including overtime pay, bonuses and statutory allowances (eg sick pay).

For More Details see our Auto Enrolment Pension Scheme
Increasing Contribution rates
om April 2018 the Pensions Regulator (TPR) is increasing minimum contribution rates from a total of 2% to 5%. Of the 5%, employers must pay a minimum of 2% with the employees making up the remainder.  For our standard scheme, employers will pay the full 5% of the contributions with no employee contributions. 

From April 2019, minimum contribution rates will increase to a total of 8%.

Banded Qualifying Earnings
In most auto enrolment pension schemes (including ours) contributions are calculated on ‘banded qualifying earnings’ earnings only. This is currently the band of earnings between £490 and £3,750. 
TPR propose that this band changes to £503pm and £3,862pm from April 2018.

Apparently the
Department of Work and Pensions (DWP) are concerned that the current proposed contribution levels will not be adequate. They are therefore proposing further changes to Workplace pensions, which may be implemented in 2020/21. They propose removing the Banded Qualifying Earnings completely so that contributions are calculated from the first £1 earned by the employee.  This would have big implications for employers and lower paid workers.

There is no proposal to change the earnings trigger of £10,000 (£833pm) for auto enrolment.

Changes to Entitlement
The DWP are also proposing that the bizarrely-named ‘Entitled’ group may be removed and all Lower earners would be able to opt in and employers forced to pay contributions.

The age threshold for Auto Enrolment may be reduced from 22 to 18.

We will continue to keep you informed about these potential changes and the effects on employers and employees.
What do you think about Auto Enrolment and Workplace Pensions?
We would be interested to hear your views about Auto Enrolment, and any questions you may have. Just or see our website.
February questions and answers top
February key tax dates top
Q. I own several properties jointly with my son. Most of them are rented out, but my son has lived in one of them for five years. My son is now considering buying a house on his own and this will become his main residence. Will he have to pay the higher stamp duty land tax charge on the purchase? Answer

Q. I am the sole director and 100% shareholder of a company. Can the company claim capital allowances for the cost of setting up a website? Answer

Q. What should we pay employees who are on jury service? Answer
28 – First 5% penalty surcharge on any 2016/17 outstanding tax due on 31 January 2018 still unpaid

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