Freesteel Blog » Sacrificing your salary for the rich

Sacrificing your salary for the rich

Wednesday, November 11th, 2009 at 12:46 pm Written by:

Just before the summer Liverpool University staff got this brochure about their new Pensions Plus salary sacrifice scam. You could tell it was a scam by the number of stock photos of smiling models holding money out to the staff in question.

In essence, they have found a way of legally lying to the taxman about employees’ pay in order to reduce tax receipts to the treasury. The deal is made very complex by the need to readjust a host of other entitlements that are pegged to the official salary rate. But here is how it’s explained.

How does Pensions Plus work?

  • You will stop making your employee pension contributions (6.35% USS, 6% ULPF)
  • The University will increase its employer contributions (currently 14% USS and 13.4% ULPF) and pay an additional amount equivalent to your current employee pension contribution (6.35% or 6%) to make a total contribution of 20.35% and 19.4% directly into the respective pension scheme
  • Your pre-swap salary, plus any other allowances and elements that are pensionable in accordance with scheme rules, will be reduced by the amount that you previously paid into the pension scheme
  • Your take-home pay will increase because you are paying less National Insurance Contributions (NIC). This is because your postswap salary will be used to calculate NICs, whereas without Pensions Plus, NICs will be calculated on the basis of the pre-swap salary.
  • The University will also see savings in the same way on the annual cost of the employer’s NICs
  • Any calculations that are normally based on basic salary such as annual pay awards, overtime, salary related allowances etc will not be affected, as these will continue to be based on the pre-swap salary
  • We will quote both your pre and post-swap salary for all external purposes, for example, when quoting your pay for mortgage applications
  • The overall level of contributions going into the pension scheme will remain unchanged
  • Your pension benefits will continue to be based on your pre-swap salary
  • Additional Voluntary Contributions (AVCs) are not included in the Pensions Plus scheme, and you will therefore

The example above illustrates how the after-tax pay of a professor will be raised by a whole £31, equivalent to a 0.09% pay rise. All the professors were delighted because they could tell everyone it was a net benefit to them (however trivial), and that was the end of this wonderful story.

Except it’s clearly a tax loop-hole. People who work for large enough institutions to pay for an accountant to shuffle around lots of paper can get it, while a lot of other honest working people who don’t have the spare capacity to employ people to fiddle taxes will continue to pay.

And anyway, tax loop-holes that are available very widely (as opposed to just the rich and powerful) generally get closed… Either that or our general taxation must be raised to compensate for the loss of revenue, on top of the economic burden of employing accountants to perform this socially useless tax rearrangement activity.

But all these budgeoning nuances escape the attention and intellectual curiousity of our useless professorial class for want of being bought off with a whole £31 a year. No wonder the economy appears to be run by lizards.

I investigated:

Dear Sir or Madam,

According to the brochure, Liverpool University is introducing the Pensions Plus scheme “to make employer’s NIC savings which will help to reduce costs”.

The brochure, however, only reports on the employee’s NIC savings, which is only one half the story.

Please may I be sent copies of documents containing:

* The full projected cost savings to Liverpool University from reduced NIC obligations and other benefits.

* The professional advice detailing the legality and long-term viability of what appears to be a newly discovered tax loop-hole.

* The full plan and cost-benefit analysis of the programme to implement this Pensions Plus scheme (including financial consulting fees, production of the above brochure, etc).

Yours faithfully,

Julian Todd

The answer came back:

With regard to the full projected cost savings to the University from reduced NIC obligations and other benefits, assuming 75% take-up of the scheme, annual savings are anticipated to be in the region of £575,000. However, this is difficult to predict as the amount will very much depend on initial take-up and ongoing recruitment.

Please refer to HMRC web pages at in connection with your query on the professional advice and legality of the scheme.

Finally, the overall budget for the scheme including cost-benefit analysis of the programme to fees and production of the brochure was approximately £75,000.

So that’s half a million quid they don’t deserve and which the rest of us who are outside the institution without our own tax fiddlersadvisers are going to have to pay.

I speculated that this was a new loop-hole that was going to get closed shortly, but in the meantime teams of sham accountants were going round to gullible bosses of venerable universities and ripping them off for fees to arrange these doomed schemes.

That page on the HMRC website is quite interesting.

According to the overview document:

A salary sacrifice happens when an employee gives up the right to receive part of the cash pay due under his or her contract of employment. Usually the sacrifice is made in return for the employer’s agreement to provide the employee with some form of non-cash benefit. The ‘sacrifice’ is achieved by varying the employee’s terms and conditions of employment relating to pay.

Salary sacrifice is a matter of employment law, not tax law. Where an employee agrees to a salary sacrifice in return for a non-cash benefit, they give up their contractual right to future cash remuneration. Employers and employees who are thinking of entering into such arrangements would be well advised to obtain legal advice on whether their proposed arrangements achieve their desired result.

The FAQ says:

If the terms and conditions provide the right to revert to cash within the period of time they are set to cover, any tax exemption may be lost. In the case of Heaton v Bell (1969), the House of Lords decided that the benefit of a company car provided through a salary sacrifice arrangement was chargeable to income tax as earnings instead of by reason of the benefits code. The key feature of the arrangement was the ease with which the employee could give up the car and revert to the higher cash salary.

Special legislation has been enacted to prevent this happening for the following exempt benefits:
* Employer provided childcare
* Workplace parking
* Employer provided cycles and cycle safety equipment

So we have a loop-hole that is held open for some stuff we want people to have, but at least the company car scam has been closed. I remember this one being offered to some of the staff years ago where I worked at NC Graphics. However it only applied to new cars, which are no good for my lifestyle. Shiny paintwork is a cost, not a benefit.

What do the unions say?

The big public sector union Unison states on an undated page:

We have seen a number of examples in recent months of employers looking to introduce salary sacrifice arrangements in relation to their pension schemes. In a universal sense, salary sacrifice is a practice that is expanding rapidly with Sainsbury’s and BT being two of many relatively high profile examples of organisations that currently adopt salary sacrifice schemes.

Another union, Unite, with almost the same name, states as of June 2005:

When the concept first emerged it was thought that it was tax loophole, which the Government would soon move to close. But there is no sign of this happening.

And internet trawling for this post brought up these committee minutes from Nottingham University May 2006:

Salary Sacrifice Scheme – the committee questioned whether this loop hole was something that the government would be likely to pick up on in the future. David Beeby advised that there is always that risk, but at the moment there were no signs of that happening and therefore we should consider taking advantage of the opportunity now.

The adviser is explaining that whether or not it is closed is a political risk, and nothing more. Proper advice would consider whether or not it should be closed in the interests of justice, and what kinds of people and institutions are profiting from it not being closed.

The calculation of risk would then depend on whether the political system is capable of making just decisions on matters that effect the income of certain classes of rich individuals and institutions.

But we don’t want to go there, because we don’t want people to be thinking about the tax system in terms of principles of justice. You never know where that would lead.

So back to my FOI request:

Thank you for the reply on 7 July to my FOI request for copies of documents relating to the Pension Plus scheme in which the annual anticipated savings and budget for the cost-benefit analysis were disclosed to me. I was also referred to the HMRC web-pages in answer to my query about the legality of the scheme.

Unfortunately, I can find no mention about the application of a salary sacrifice scheme to pension contributions on the HMRC web page. However, the overview document by HMRC does state that “Employers and employees who are thinking of entering into such arrangements would be well advised to obtain legal advice on whether their proposed arrangements achieve their desired result.”

Please consider this letter as a clarification of my original request. I am requesting copies of the documents, not merely some information contained within documents.

I would like the documents containing:

* A copy of the first official letter where this scheme was raised, either by an outside agency, or an officer of the university.
* Copies of documents wherein “the full projected cost savings to the University from reduced NIC obligations and other benefits, assuming 75% take-up of the scheme, annual savings are anticipated to be in the region of £575,000” are stated and justified.
* A copy of the written cost-benefit analysis of the programme, which combined with the “fees and production of the brochure was approximately £75,000”.
* A copy of the invoice from the body to whom the above “fees” were paid
* A copy of the legal advice regarding the proposed arrangements, as advised by HMRC.

FOI requires that the University confirms whether or not documents as described exist, and then discloses their contents, subject to the statutory exemptions.

And the reply:

For your information, these types of schemes exist in a wide variety of public and private sector organisations and as long as they are approved by the HMRC there is no legal bar to such schemes.

With regard to your specific request for documentation, we do not have an official letter where this type of scheme was first raised. Rather, our awareness of these schemes occurred around 6 or 7 years ago when the concept was relatively new. At that time the University did not want to implement the scheme, but now feel that the time is right to offer additional benefit options to employees .

As requested please see the attached report produced for the benefit of the University’s Senior Management Team setting out the projected cost savings. This report also satisfies your request for a copy of the written cost–benefit analysis above the scheme.

With regard to your request for a copy of the invoice relating to the fees paid in connection with the scheme, you will appreciate that these costs relate to consultancy fees charged by PricewaterhouseCoopers to support the University in implementing the scheme. These rates were provided in confidence and are commercially sensitive and revealing these details could damage the relationship between the University and PricewaterhouseCoopers. Accordingly, these fees are exempt from disclosure under Sections 41 and 43 of the Freedom of Information Act.

Finally, with regard to your request for a copy of the legal advice on the arrangements, no such specific legal advice exists. The scheme is based largely on the schemes that have already been approved by HMRC and it was not considered essential to add to the costs by securing specific legal advice on this matter.

So it would appear that I’ve drawn a blank, and wealthy institutions with money to spend on socially useless tax fiddling are free to rip off the public funds that the rest of us can only afford to contribute to at the face-value rate.

But the story doesn’t quite end.

An article on the front page of the Guardian today:

Gordon Brown warned: axing childcare vouchers will cost Labour seats

Nine former ministers today rounded on Gordon Brown’s plans to cut childcare, warning the prime minister that he is threatening marginal Labour seats in the runup to the election by axing popular support for hard-working parents.

The warning came from normally loyal former ministers – including Patricia Hewitt, Estelle Morris, Hilary Armstrong, Beverley Hughes and Caroline Flint – who say the plans to cut childcare vouchers for more than 340,000 parents are “greatly unfair” and “mark the undoing of one of Labour’s landmark achievements”.

Brown announced he was removing tax relief for employer-based childcare vouchers, arguing that too much of the money was going to the middle classes. He has outlined plans to switch the money to provide 10 hours of free childcare for 250,000 two-year-olds by 2015. But removing vouchers, which are thought to save parents up to £2,400 a year on the cost of nurseries, nannies or childminders, would strip “effective and popular childcare support from hard-working parents”, the former ministers said.

More than 70,000 people have signed a petition on the Downing Street website criticising Brown’s decision and urging him to reconsider. Some of the signatories to the letter have likened the revolt to the way the government was caught on the hop over opposition to the abolition of the 10p tax band.

Of course, being written by the proper journalist Patrick Wintour, there are no citation links in his article, like you get from a blogger.

The Number 10 petition to keep vouchers is here, which includes the Prime Minister’s answer:

We are making these changes because we feel that the tax relief is currently badly targeted. Around a third of the benefit for ESC goes to the 6% of parents who pay tax at the higher rate. But more importantly, we want to use the money to extend free nursery places to many thousands more 2 year olds. These nursery places are really popular with parents and they give children the very best start in life – helping to achieve a fairer society in which everyone can thrive.”

Nor can Patrick Wintour be bothered to give a link to Gordon Brown’s announcement. I can’t find it either, but I can see that the Daily Mail is on the warpath over this one:

Gordon Brown was accused yesterday of ‘mugging’ the middle classes by increasing free childcare for the poor at the expense of better-off families…

Aides of the Prime Minister said that a third of the tax relief – about £200million – goes to higher-rate taxpayers earning more than £43,000.

But they risked infuriating thousands of senior teachers, nurses or policemen by saying anyone earning more than £43,000 was not classed as a ‘middle-income’ earner…

It is not fair that around a third of tax relief for childcare goes to the six per cent of parents who pay tax at the higher rate.’

My friends…, tax policy is one of the worst, most maliciously misreported issues of public policy out there.

It is a subject that also has proven capacity for the conversion of blatant lies into votes.

If this country were a democracy, then the rich — who are in a tiny minority — would get taxed properly.

And if they weren’t taxed properly, they would have to come up with some damn good explanation for why they shouldn’t be.

But they don’t.

Instead they print lies and distractions in the newspapers they own, and persuade ordinary people who believe they care about money to be in favour of things that are against their own economic interests.

All they have to do is buy off the public with a stated tiny numerical amount, and the rich can walk off with the loot. And none of the university economics professors look at any part of the story — even when aspects of it touch their own pay and institutions.

Believe it or not, there are still people who believe that the pensions and stock market crisis was caused by Gordon Brown’s 1997 £5billion raid on the pensions tax relief.

Except it’s not true, as Evan Davis explains:

What Gordon Brown wanted to do was raise about five billion pounds. And his idea was to reform the particular way that corporation tax and income tax overlapped, in their treatment of company dividends…

There is a long history to this, and of awkward interactions between the two tax systems… In practice, this system was implemented in a complicated way with implications beyond the remit of this article….

However, in our progression from the classical to partial imputation systems, the most striking fact now was that some shareholders were in effect paying no tax on dividends, even though retained earnings were taxed. In particular, concern grew that this gave too much of an incentive for those shareholders to seek dividend pay-outs….

So what does this whole story of the chancellor’s first, big tax reform tell us? It doesn’t allow us to say he destroyed the pension system, for two reasons. Firstly there were enough other, bigger things going on that did more damage.

And secondly, it was open to us to keep our pensions alive, by investing more in them if we wanted to fill the hole he had left. The chancellor may have put an obstruction in the pensions road, but he wasn’t driving the car that crashed into it. That was in the hands of employers who were free to increase contributions but chose instead to accelerate the closure of final salary schemes.

Seems reasonable. So it’s probably not true that — as the Torygraph says — Brown’s raid on pensions costs Britain £100 billion. A lot of the money came from rich people who had been paying no tax on dividends. The pension system, such as it was, could have easily dealt with it. This was not the “crisis” that ruined the system. Unfortunately it is in a lot of people’s interest the spread the lie that it was.

Massive funds do in fact need to be raised from the economy to bail out the banking system that the rich have also ruined. Where are we supposed to get the money for that?

But the mishandling of the story, a media news system that is largely owned by the rich, useless university professors who can be bought off for £31 per year, and a supine misinformed public — results in a tax system that is deliberately be left in a broken state for the rich to send over their tax accountants to fetch the loot.

Our society is currently structured around short-term, trivial, marginal money. It no longer operates on duty, patriotism, justice, or intelligent informed foresight. That’s why wars are fought with mercenaries, rather than drafted volunteers. That’s why private interests fund and control our political parties. As we count our pennies and believe it is enough.

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