High rate pension tax relief for the chop?

MrChips

Judwin wrote: »

The Man from the Pru who first sold me my pension said that removing the HRT relief was on the cards - and that was back in 1989. So if the government do go down that route, then at least I've had 20 years worth.

However, I can see big problems with what sounds like a simple/good idea to get more tax out of those earning more than about £44K.

1) Anyone with any sense should already be contributing to their personal pension / SIPP via salary sacrifice if at all possible (i.e. your employer will do it). Contributions are both tax and NI free to for employer and employee. So unless they're gonna make us put employer contributons on our Tax Returns, then removal of HRT tax relief will actually cost the Government money.

2) If they do tax us on Salary sacrifice, what are they going to do about defined contribution company pension plans some of which are non contributary? Presumably they'll force the employee to declare how much the employer has paid on your behalf on the tax return?

3) Final salary pensions? How do they 'cost' what the effective company contribution would be worth to each member? They would effectively be taxing company payments into the final salary pension pot. And given that many final salary pension pots are in huge defecit, that's going to be a popular as a chocolate tea pot.

Item 3 is the killer IMHO. If the govenment do anything that further affects final salary pension pots there will be uproar. And if they don't attempt #3, then #1 and #2 are unfair. So ultimately, all they'll do is taxing those HRT payers with personal pension plans into which they make personal payments from taxed income. I doubt that will raise very much money for very long.

IMHO
Judwin

Since 22 April 2009 they are doing all the above for people who earn over £150k pa (or who have over the previous 2 tax years) on pension benefits/contibutions in excess of their "normal pattern" to prevent them getting in additional contributions before higher rate tax relief is abolished for earners over £150k.

Employer DC contributions count as a taxable benefit (at 20% this year, and 30% next year when the 50% tax rate comes in). Benefits accrued in a DB scheme are valued (I think) by assuming the capital benefit is 10x the increase in accrued pension.

One company I work with didn't realise this and gave a former employee a one year augmentation to his final salary benefits in lieu of his notice period. This won't be very popular when he fills in his tax form next year and finds out this "non-normal" benefit accrual is going to hit him with a £15k tax bill!

Judwin

zygurat789 wrote: »

1 The link will still be there whatever. They pay standard rate tax. Why should their contributions cost them less because they earn more?

The idea is that you are defering part of your current salary to be paid later when you retire. At that point you will pay tax on it at whatever your retirement rate is. If you are defering it for now, then effectively you havent received it yet, so there is no tax to pay.

Limiting the tax relief to basic rate destroys the above idea, and SSISA's all of a sudden become much more attractive retirement vehicle for higher rate tax payers who will still be higher rate in retirement.

Cheers,
Judwin

Judwin

MrChips wrote: »

Employer DC contributions count as a taxable benefit (at 20% this year, and 30% next year when the 50% tax rate comes in). Benefits accrued in a DB scheme are valued (I think) by assuming the capital benefit is 10x the increase in accrued pension.

Is that true for everyone, or just those earning over £150Kpa?

It doesn't affect me since I don't earn anywhere near £150K, and I don't have a DC or DB scheme.

MrChips

Just those earning over £150k gross in a tax year in or since 2007/08, and until 2011/12 tax year the charge is only on contributions/benefits outside the usual pattern as part of the "anti-forstalling" rules. From 2011/12 the tax relief is only at the basic rate for earners over £150k.

noh

zygurat789 wrote: »

Pension contribution .£100 £100
Standard rate tax relief @ 20% . 20
Higher rate tax relief @ 40% .40
Net cost .60 .80

The net cost is higher for the standard rate taxpayer.
All taxpayers are entitled to 20% added to their contributions up to £3600

Im well aware of the figures.

The cost is exactly the same for a standard rate and higher rate tax payer.
If they wish to contribute £1000 gross to a pension they both need to earn £1000.

The only group who have an advantage is non taxpayers who can contribute £1000 at at cost of £800

zygurat789

Judwin wrote: »

The idea is that you are defering part of your current salary to be paid later when you retire. At that point you will pay tax on it at whatever your retirement rate is. If you are defering it for now, then effectively you havent received it yet, so there is no tax to pay.

Limiting the tax relief to basic rate destroys the above idea, and SSISA's all of a sudden become much more attractive retirement vehicle for higher rate tax payers who will still be higher rate in retirement.

Cheers,
Judwin

no it doesn't this is twisted logic

zygurat789

noh wrote: »

Im well aware of the figures.

The cost is exactly the same for a standard rate and higher rate tax payer.
If they wish to contribute £1000 gross to a pension they both need to earn £1000.

The only group who have an advantage is non taxpayers who can contribute £1000 at at cost of £800

i repeat ALL TAXPAYERS CAN CONTRIBUTE £1000 AT A COST OF £800

It is a simple question of comparing what you pay with what you get.

Judwin

zygurat789 wrote: »

no it doesn't this is twisted logic

Would you care to expand on what the twisted logic is?

I accept that not all see it as being defered income, but that is my understanding of the inital (1909) reasons for the tax treatment. But if you're referring to the SSISA thing being twisted then currently...

A HRT rate tax payer paying into a pension is taxed at 0% on the way in, and the money coming out is taxed at 20% or 40% depending on their tax rate when retired.

A HRT rate tax payer pays taxed income into an ISA. Therefore the money going in is taxed at 40%, and the money coming out is taxed at 0%.

If the rules are changed, and a HRT tax payer can only claim tax relief at basic rate for pension, then the sums become....

A HRT rate tax payer paying into a pension is taxed at 20%, and the money coming out is taxed at 20% or 40% depending on their tax rate when retired. This double taxation results in compounded tax rates of 36% and 52% respectively for HRT tax payers who become Basic/HRT when retired.

The Tax teatment for ISA's is unchanged. And next year the ISA limit is £10K+, so plenty of scope to build a big ISA/pension pot which (under current rules) will be tax free on retirement.

Ian_W

EdInvestor wrote: »

It's already been limited for the best paid.Now the Govt has eneded high rate relief for childcare vouchers.Is the writing on the wall for pensions?

I'm not really sure that the 2 correlate all that well. Childcare vouchers and various "tax credits" are really a form of state benefits whereas private and occupational pensions are a self provided benefit for retirement which the states only "contribution" is tax relief on the payments in. As the payments out (except the 25% lump sum) are taxable then it's more than likely to be a deferment than a freebie.

I was a HRT but am now a BRT by my choice. I always found it rather odd that it only cost me £60 per £100 pension payment, whereas a BRT, who by definition would be earning less (often far less) had to pay £80 for the same contribution. I'm sorry, the argument that you've both paid £100 doesn't wash - don't make a pension contribution and I get £60 to spend on something else whereas the BRT gets £80 - so it is costing them more whichever way you dress it up.

Wouldn't it be fairer and encourage more lower paid workers to make greater pension provision if tax relief was standardised at say 30% whatever tax bracket you fall into? Logically as a HRT you pay 20% tax up to circa £40K so why should ALL your pension contributions be at the higher rate? The precedent is there of giving tax relief to none tax payers so there is no argument IMO that the relief has to relate to the actual tax band you're in.

zygurat789

Judwin wrote: »

Would you care to expand on what the twisted logic is?

I accept that not all see it as being defered income, but that is my understanding of the inital (1909) reasons for the tax treatment. But if you're referring to the SSISA thing being twisted then currently...

A HRT rate tax payer paying into a pension is taxed at 0% on the way in, and the money coming out is taxed at 20% or 40% depending on their tax rate when retired.

A HRT rate tax payer pays taxed income into an ISA. Therefore the money going in is taxed at 40%, and the money coming out is taxed at 0%.

If the rules are changed, and a HRT tax payer can only claim tax relief at basic rate for pension, then the sums become....

A HRT rate tax payer paying into a pension is taxed at 20%, and the money coming out is taxed at 20% or 40% depending on their tax rate when retired. This double taxation results in compounded tax rates of 36% and 52% respectively for HRT tax payers who become Basic/HRT when retired.

The Tax teatment for ISA's is unchanged. And next year the ISA limit is £10K+, so plenty of scope to build a big ISA/pension pot which (under current rules) will be tax free on retirement.

Tax relief is at the discretion of the government. If they wish to encourage something then they will apply a relief, if they wish to discourage something then they will apply a tax. Do you need to be encouraged to save for your retirement?
A taxation system should treat all subjects fairly (to tax a higher income at a higher rate is acceptable) and the fact remains that a higher rate tax payer pays less for the same premium as a standard rate taxpayer.
All payments to a pension are ultimately savings (the wrapper used is largely for tax reasons ) and I can see no good reason why someone earning a large income should pay less than someone on a lower rate just because of the larger income