End of 40% tax relief on pensions?

johnllew

I benefitted from HR relief on my pension contributions for many years but I can see the argument for restricting relief to the basic rate. Why should (comparatively) rich people get twice the rate of relief as poorer people?

baby_boomer

In five year's time I might agree with you .

Fancy splitting your pension with me in the meantime - in the interests of fairness?

Old_Slaphead

johnllew wrote: »

Why should (comparatively) rich people get twice the rate of relief as poorer people?

Because a lot of them are MPs and MPs mates.

jamesd

johnllew wrote: »

I benefitted from HR relief on my pension contributions for many years but I can see the argument for restricting relief to the basic rate. Why should (comparatively) rich people get twice the rate of relief as poorer people?

Well, I can think of a few reasons to get things started:

1. The 6% of people who pay higher rate tax are still paying more than half of the income tax paid by the whole population. Seem to be more than doing their share of income tax paying already.
2. They don't really get twice the tax break. When people are over 65 there's about 10k of income that is free of income tax. If you're on 20k of total retirement income, that's half your income. If you're on 30k total, you only get about 6k of income free of tax so instead of half the income being free of tax only one fifth is. So they end up paying more in tax in retirement just as they did when working.
3. If an employer is being sensible and using salary sacrifice it isn't twice as much. At higher rate the possible gain is 1% employee NI, 13% employer NI and 40% income tax, total 54%. For basic rate it's 11% employee, 13% employer and 20% income tax, total 44%. So if your employer isn't using salary sacrifice and paying their employer NI into your pension, go ask them why.
4. Higher rate people already pay 1% NI on the higher rate income without getting any more state second pension value because of it. Over the coming years that's being reduced even more, so lower income people are going to get a boost at the expense of higher earners. And the NI rate is going up as well.
5. They only get the tax relief if they lock the money away in their pension. Then it makes it less likely that they will need state benefits, including things like means tested benefits and council paid for care homes. That's also a pretty big transfer from those who go for the higher rate relief that benefits everyone else.
6. If someone is working in two jobs or doing lots of overtime why should they pay 40% just for working harder anyway?
7. If someone is living in London instead of a cheap part of Wales or the North-east, why should they pay more tax just because they happen to live in a more expensive part of the country? Shouldn't the tax system make allowances for cost of living in different places so just living somewhere doesn't cause you to pay more tax?

MoneyTown

Well put !!

baby_boomer

Jeremy Warner in the Independent - Pensions make easy target as Treasury gets desperate

".....Call the sum that the Government could potentially save a nice round £5bn (eerily similar to the dividend credit raid), and you'd be in the right ball-park. Such a tax hit could quite easily be presented as "progressive" if accompanied by a more generous rate of basic tax relief available to all pension savers. Higher- income earners would lose out, but low earners would get extra relief.

Better still, it is one of the few effective tax increases that could be achieved without any substantial short-term impact on demand, since this is money that would otherwise be saved rather than spent....."

".....Politically, removing the higher- rate tax relief [is] dangerous stuff ahead of an election. Regrettably, it is going to be very hard to resist for any incoming government charged with cleaning up the present mess. Whatever the new government does is going to be unpopular. Despite the fact that removing the higher-rate relief would further discourage saving, might well further swell already burgeoning pension fund deficits, and would be a body blow to the personal pensions business of the insurance industry, it may well look like one of the least bad options."

EdInvestor

Only those earning 150k or more will be hit from 2011, and then only gradually.

The big increase in the ISA rate from 7,200 to 10,200 (from October for those 50 or more, from next year for everyone else) Is very welcome

baby_boomer

Most high earners keep pensions' tax break - This is Money

I'm totally devastated but not for the expected reasons.

To be lumped together with OAPs in an ISA concession for this year is a reminder that Old Father Time is on the march.

Does Darling have money to burn, or is there an election on the horizon ?

Old_Slaphead

baby_boomer wrote: »

Most high earners keep pensions' tax break - This is Money

To be lumped together with OAPs in an ISA concession for this year is a reminder that Old Father Time is on the march.

Well look on the bright side - at least we won't have to pay for this labour fiasco for the next 25 years (mind, by the time I get to 60 in a couple o years they'll probably have stopped the free buspasses and winter fuel allowance)

EdInvestor

baby_boomer wrote: »

To be lumped together with OAPs in an ISA concession for this year is a reminder that Old Father Time is on the march.

One suspects there is a large army of individuals between 50 and 65 who might be described as unemployed, or as part time workers, or as "consultants" or who are enjoying early retirement. Sad to say redundancy is often a fact of life for people in their 50s in recessions, and new jobs can be very hard to find.That's why the ability to take benefits from a pension at 50 can be very usefdul, especially the 25% tax free cash.

One suspects that this group was behind much of the anger over the removal of the 10p tax band - which didn't really affect the over 65's at all.

Bear in mind that the age for taking pensions will rise to 55 next April, so even if you are over 50 now, but not yet 55, you will have to wait.A definite case of 'use it or lose it'.