Restriction of pension tax relief to 20%

gadgetmind

I know this rumour does the rounds fairly often, along with the end of tax free lump sum (now rebranded as Pension Commencement Lump Sum) but the rumblings seem louder than usual.

Does anyone think the silly sods are serious?

exxxybeast

I would be very very surprised as it is the main incentive for private pension planning.

That said, it is a quick fix help to a huge national debt problem, so who knows, but nothing is going to happen overnight

gadgetmind

They've done crazy knee-jerk things like this pretty much over night in the past.

It annoys me that they woffle on about this tax relief costing them money: it doesn't. All it does is let people spread their income, so less now, more when retired, and all taxed at the prevailing rate at the time.

jem16

gadgetmind wrote: »

.It annoys me that they woffle on about this tax relief costing them money: it doesn't. All it does is let people spread their income, so less now, more when retired, and all taxed at the prevailing rate at the time.

I would imagine though that there are a fair number of people who qualify for 40% tax relief but will only pay 20% in retirement. Those people are the big winners.

gadgetmind

jem16 wrote: »

I would imagine though that there are a fair number of people who qualify for 40% tax relief but will only pay 20% in retirement. Those people are the big winners.

And a lot will qualify for 20% tax relief and not pay any tax on some/all of it in retirement. Shouldn't they also be penalised?

laurel7172

Can somebody explain to me why it's fair that a high earner should get more tax relief on their pension contributions than a basic rate taxpayer?

After all, if it's necessary to give 40% tax relief as an incentive, shouldn't *everybody* get it?

jem16

gadgetmind wrote: »

And a lot will qualify for 20% tax relief and not pay any tax on some/all of it in retirement. Shouldn't they also be penalised?

Yes you are correct but probably fewer gain here.

I don't think anyone should be penalised. If you pay tax at whatever rate then that is the tax relief you get.

jem16

laurel7172 wrote: »

Can somebody explain to me why it's fair that a high earner should get more tax relief on their pension contributions than a basic rate taxpayer?

They pay more tax.

After all, if it's necessary to give 40% tax relief as an incentive, shouldn't *everybody* get it?

Everybody gets tax relief at the same rate of tax that they pay.

gadgetmind

laurel7172 wrote: »

Can somebody explain to me why it's fair that a high earner should get more tax relief on their pension contributions than a basic rate taxpayer?

Sure, I'm happy to help you out there.

Person A and person B both earn £100 and want to put it into their pensions. Person A pays 40% tax, so only gets £60 in their pay packet but Person B pays 20% tax so they get £80.

Person A puts £80 into a pension, and HMG adds another £20 to this, and gives them another £20 back via their tax return to make up for the fact that they were £20 down compared to person A.

Person B puts their £80 into a pension and HMG adds £20 to this.

End result, both Person A and Person B have the £100 that they earned in their pensions and none of that £100 left in their bank accounts.

Total cost to HMG is zero as all they have done is give back what they took in the first place.

laurel7172

I understand the maths very well, but thank you

It's also true that a BR taxpayer puts in £80 of their take home pay, and receives £20. An HR taxpayer puts in £80 of their take home pay and receives £40. And that's ignoring the effect of NI (which the BR taxpayer probably pays at 12% at their margin) as well. It depends where you choose to count from, really.

Sorry-I am really only having a little bit of a tease. It was mostly the poster above who said it was the main incentive for saving. I just don't see HR taxpayers deciding to live on the state pension if they only get 20% relief. And more fool them if they do.

Meeper

Sorry, but you said you understood the maths. I disagree.

If a higher rate tax-payer puts in £80 net, they do not receive £40.