Volume 2018 | Issue 56 | 31 October 2018
The 2018 Budget is generally positive for employees, with over £30Bn being ‘given away’ in additional funding, revised allowances and frozen duties.
Changes in tax allowances will result in an increase in take-home pay and for many will soften the impact of pension contribution increases as next April’s automatic enrolment increases take effect, giving an opportunity for a reassuring and positive approach to pension and benefits communication.
Health and financial wellbeing initiatives give an opportunity to review how these areas are supported in the workplace, including education about the impact of pension tax allowances (which remain broadly unchanged).
In short, the Budget had few nasty surprises and there is no need for a hasty review of workplace pension and benefits, but there is potentially good news for employees and an opportunity for communication and engagement on these and other topics that continue to affect employee benefits and pension scheme members.
We look in more detail at some of the impacts on the workplace below.
In this issue: Changes in the Workforce | Positive Impact on Take-home Pay | Wellbeing | Pensions and Savings | Final Thoughts
Changes in the Workforce
In a bid to crack down on tax avoidance through private service companies, from April 2020 employers with more than 250 employees will become responsible for checking the employment status of their contractors and will be liable for paying tax fines if they do not comply.
In some circumstances this may lead to some contractors becoming directly employed, with the knock-on impact to the employer of benefit entitlements including pension contributions.
The government will also introduce a package of reforms to strengthen the role of employers in the apprenticeship programme, so they can develop the skills they need to succeed. The Budget also included a number of pilots to address regional skills shortages, such as digital skills.
The Budget also included incentives for business to make capital investment and invest in training their staff, in line with their aim of increasing productivity, boosting economic growth and delivering higher income for people across the country.
Positive Impact on Take-home Pay
One of the few surprises in the Budget was the changes to Income Tax thresholds. The Conservatives made a manifesto pledge to raise the Personal Allowance (the point at which Income Tax starts to be paid on earnings) to £12,500 and the Higher Rate Tax threshold to £50,000 by the end of the current parliament in 2020/21. These changes will now be implemented in April 2019, resulting in potential Income Tax savings of £130 per year for basic rate taxpayers and £860 per year for Higher Rate taxpayers.
The National Living Wage for the over 25’s will go up to £8.21 per hour in April 2019, an increase of 4.9% and benefitting approximately 2.4 million workers. The government has expressed an ambition to end low pay and will consult with the Low Pay Commission, employers and unions on this objective, taking into account the potential impact on employment and economic growth.
Work allowances within Universal Credit received an additional funding of £1.7Bn through the increase of the taper earnings threshold by £1,000 and a net benefit of £630 per annum. This is forecast to benefit 2.4 million working families.
National Insurance thresholds have also risen which will dilute some of the positive impact to taxpayers, as will the impact of automatic enrolment pension contribution increases in April 2019. However, most employees will see a benefit from these measures.
Wellbeing
The Budget included several initiatives which mirror wellbeing trends already emerging in the workplace.
£2Bn of the £20Bn of additional funding for the NHS will be earmarked for supporting mental health, including 24/7 helpline support via NHS 111. Access will be expanded to the Individual Placement Support programme to help those with severe mental illness find and retain employment, benefitting 55,000 people by 2023/24.
The Budget announced a new parental bereavement leave of up to two weeks for parents suffering the death of a child under 18 years old.
The Budget also announced a wide range of financial wellbeing policies to help households manage unexpected costs by increasing access to fair and affordable credit. A new independent body will be established to promote financial inclusion; it will be responsible for deploying an initial £55 million of funding from dormant bank accounts, primarily to address the problem of access to affordable credit.
The government will work with debt charities and the banking industry to design a pilot for a no-interest loans scheme in early 2019, and will undertake a consultation on a breathing space scheme for people who fall into problem debt.
Recognising that credit unions play an important role in facilitating savings and offering affordable borrowing to their members, to boost awareness and membership the Budget committed to a pilot of a new prize-linked saving scheme for credit unions. The government will also provide £2 million to launch a challenge fund to promote innovative technological solutions that will harness the power of the UK’s world-leading Fintech industry to support social and community lenders.
Pensions and Savings
The pre-Budget speculation that pension tax allowances may be reduced ended up being misplaced and there was very little change to the current pension and saving tax regime.
The pension Lifetime Allowance will get an inflationary increase to £1,055,000 from April 2019, while the Annual Allowance on contributions remains unchanged at £40,000.
The Tapered Annual Allowance remains for individuals with taxable earnings over £150,000. This has now been in place since April 2016 and is now becoming a widespread issue as impacted employees are likely to have reduced opportunity to carry forward unused relief from previous years.
The Money Purchase Annual Allowance remains at £4,000 and continues to be a potential pitfall for individuals over the age of 55 who withdraw savings from their pension plans.
The ISA limit remains unchanged at £20,000 per annum.
The government has promised £5m in 2019/20 to fund the development of Pension Dashboards. These will enable individuals to see all of their pensions – including the State Pension – in one place online and will be a relevant part of any pension communication or engagement discussion.
The projected value of member funds in defined contribution (DC) pensions is projected to reach £1 trillion by 2025. The government recognises that this money has a vital role to play in long-term financing for UK growth and innovation and so the British Business Bank is working on options for pooled investment in “patient capital” for these long-term investments with some of the largest DC pension providers, including Aviva, HSBC, L&G, NEST, The People’s Pension, and Tesco Pension Fund. At the same time, the Financial Conduct Authority (FCA) is looking at regulatory changes needed to allow this to happen. Over time, we expect this to have a potentially beneficial impact on default funds in DC schemes.
After lengthy delays, draft regulations were also launched that would introduce a ban on pensions cold-calling to tackle the growing risk of scams which target pension members at retirement or when transferring their pension fund. After an original consultation launched in December 2016, the ban is now expected to take effect shortly.
Final Thoughts
The incentives promoting health and financial wellbeing initiatives are particularly welcomed, as we have direct experience of the benefits that such initiatives can provide to employees and employers alike.
The government’s support for digital skills also reflects the growing trend of people performing more of their essential financial interactions online – including pensions and benefits in the workplace. We will support the Pension Dashboard project and continue to invest in our own powerful digital engagement solutions for employees and members.
We have always promoted evidence-based decision-making amongst our clients and are delighted to see that the government is also increasing its use of this approach, by working with the Office for National Statistics to better understand how investment in people helps improve their earnings and skills.
We would be remiss to not include some final notes of caution. First, the 2018 Budget assumes a successful deal is agreed for the UK to exit the EU in an orderly fashion on 29 March 2019. Should this not be the case, there is likely to be an Emergency Budget in April and a lot of the changes proposed in the 2018 Budget could be superseded.
Finally, individuals across the spectrum continue to struggle with pensions tax allowances (the Tapered Annual Allowance and the Money Purchase Annual Allowance in particular), pensions scams through cold-calling and the impact of whether or not tax relief is received due to the differences between net-pay and relief-at-source DC schemes. It is worth exploring how your employees or members are affected by these issues, particularly as some of the impacts are irreversible.