Budget 2015: Five things for universities to watch out for

Pension relief, salary sacrifice schemes and higher education budgets could be targeted by George Osborne, says Jack Grove

July 7, 2015
Budget savings needed
Source: istock

George Osborne, the chancellor of the Exchequer, is due to deliver his 2015 summer Budget address at 12:30pm tomorrow.

Previous Budget announcements have included a package of measures to strengthen support for postgraduate researchers and measures to boost postgraduate student numbers. But what might tomorrow’s speech have in store for universities? Here, we consider five possibilities. 

Higher education cuts

Mr Osborne is likely to reveal how much of the in-year £450 million cut to the Department for Business, Innovation and Skills announced in June will fall on universities.

Both further and higher education were singled out last month as areas for potential savings in 2015-16 when the chancellor outlined plans to make an early start on cutting the deficit, and many expect universities to be hit harder than previously given painful cuts already suffered in the last Parliament by further education.

Funding for apprenticeships and student maintenance are unlikely to be touched for the in-year savings, but the mention of clawing back “known underspends and unallocated funding” has led to speculation that £52 million of transition funding linked to the research excellence framework could be withheld.

Another potential area of cuts is the Higher Education Funding Council for England’s £1.4 billion teaching grant, which includes £380 million for student opportunity funding – previously described by Treasury sources as a “slush fund” for universities given the lack of evidence on how it is spent.

There is also the potential for Mr Osborne to signal where future higher education cuts may come from. As predicted last month, student maintenance grants worth up to £3,387 a year for poorer students will be converted into loans, the Treasury has apparently confirmed.

At present, students from families earning less than £25,000 a year receive the full non-repayable grant, with lower grants available to those from families earning up to £42,620 a year.

It follows calls by former universities and science minister David Willetts for a “substantial shift from maintenance grant to loans, so that there is also a saving in public spending”.

Salary sacrifice

The chancellor needs to find £12 billion in welfare cuts, but much-heralded caps on benefits will save only about £1.7 billion.

That means that Mr Osborne may need to look at some more unpopular areas for savings, with some suggesting that he may target the £15 billion spent each year on salary sacrifice schemes.

Speaking earlier this month, former pensions minister Steve Webb said that he would be very surprised if the Treasury was not examining this policy, which allows employees to reduce their tax bill and avoid paying national insurance contributions by sending some of their gross salary into pension schemes.

Such a change could have major implications for pensions, but also for other benefit schemes, such as childcare voucher programmes or direct salary sacrifice initiatives operated by many campus crèches.

These schemes can save some families up to £1,000 a year as parents give up a portion of their salary and receive the same value in childcare vouchers.

The government would, however, point to the fact that this old scheme is being replaced by a new system in which the state tops up 20p for every £1 spent on childcare, up to £2,000, although critics will say this is less generous.

Pension allowances

About £35 billion a year is claimed on pension relief, of which about 70 per cent goes to higher- or top-rate taxpayers, so expect this area to be targeted.

The government is widely expected to cut the tax relief available to the highest earners, which currently enables staff to pay up to £40,000 a year into their pensions and gain tax relief.

That threshold means that only staff earning more than £150,000 a year need worry about this change, but if the new limit is reduced to £30,000 a year or lower, many more high earners picking up about £100,000 will lose a large chunk of this tax perk.

What might hit many more university staff are changes to the lifetime allowance, the upper limit over the lifetime of a pension pot after which 55 per cent tax applies.

This was recently £1.8 million but is set to fall to £1 million, which may still sound huge, but pension experts warn that this could affect workers who retire on about £20,000 a year.

Given that many university staff remain in the same pension scheme for their entire working careers, they are also more likely to build up larger pension pots than employees with smaller pensions at different companies – making them more likely to be affected.

Income tax changes

Raising the tax-free personal allowance from £10,600 to £12,500 – a widely trailed announcement – will be good news for almost everyone in higher education.

But that change – criticised by some as a tax giveaway to the rich, rather than the poor – may take until 2020 to implement. In the meantime, personal allowances are set to rise to £10,800 next year and £11,000 the next.

However, many higher education staff may not feel the benefit of the change in April 2016  because of pension changes coming into effect at the same time.

Under changes to the Universities Superannuation Scheme effective from 30 March, employee contributions will increase to 8 per cent of salary (from 7.5 per cent for current final salary members, and from 6.5 per cent for career-revalued benefits members), alongside changes to the benefits scheme.

Additional contributions of 1.4 per cent of salary will also take effect for many staff as national insurance rebates for contracted-out pension schemes end in April 2016 too – a double whammy for those in higher education pension schemes.

Universities will also be hit by higher costs relating to the changes – paying 2 per cent extra of salary (18 per cent from April) and a similar amount in relation to national insurance changes – possibly prompting further efficiencies.

Devolution

There are plans to devolve more fiscal powers to England, Scotland, Wales and Northern Ireland.

Wednesday’s Budget could include more details about devolving tax powers to Scotland, with the first 10 per cent of Scottish VAT revenues staying north of the border.

More Holyrood control over tax revenues could mean more money for Scottish universities.

Jack Grove is a reporter for Times Higher Education.

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