Osbourne's tax relief changes in the March budget

tinter

EdSwippet wrote: »

This is the second time you've quoted 32.5%, but I can't follow your maths. Can you expand on it..

You are quite correct. I simply deducted 5% from your previous maths, but I see now you did not miss the tax free lump sum so you are correct; the benefit is still present, however, so its still not useless. Its also worth noting pensions also now are a very attractive inheritance vehicle.

I note you have not commented on my maths, which I'm rather more confident in, showing that 7/8 HRT payers (at least- as most of the 1/8 will take some or most of their pension at lower tax rates) end up paying a lower overall rate than basic rate tax payers. Is this desirable?

If HRT tax payers do stop taking pensions, the government no longer has to offer them tax relief. This is a nice saving (especially as 7/8 pay basic rate in retirment!) for the government, unless they can easily find a way to avoid more tax than the tax relief offers.

Reducing the tax relief to 30% doesn't somehow make it into government income. It only creates any kind of problem if they find some other way to decrease their tax more than pensions relief previously offered, but if they can do that then they surely should be doing so anyway.

I've seen mention of some tools like VCTs, but these are a) quite a different product and b) the government believe they will generate growth sufficient to offset the lost tax relief's (if lots of people go in and this doesn't seem to work, they will presumably be removed).

Even if the government takes a loss on the basic rate payers higher contributions, unlike with HRT payers it will eventually make some savings as this reduces future means tested payments and covers care costs that were previously paid by the government. Its for these reasons that the government has an interest in pensions, after all; increased BRT contributions are a good thing net.

Indeed, if the only problem was being cost neutral, then the government should just leave basic rate relief as is and reduce higher rate relief. There is no reason for the government to give the large subsidy it does to over 7/8ths of HRT payer.

Also, bribe is very unfair. 40% relief when paying 42% overall is a fair incentive for higher rate tax payers, but 30% when paying 32% overall is a bribe? Come now.

Linton

EdSwippet wrote: »

Is it really? As demonstrated by figures above, certainly not for everyone. Bad enough for HRT, but a lot worse still for ART and 60%'ers. Remember that the takings from these few have to overcome the supposed deluge of new pension savers paying basic rate tax and who, is it proposed, will now be offered a [STRIKE]bribe[/STRIKE] incentive by the government.

Your calculation assumes that someone paying HRT/ART whilst employed will also pay it in retirement. I would think this is unlikely for most people in higher paid high skilled employment, say on £50K-£100K. Especially as they have the option of putting a significant amount of money into S&S ISAs for tax free income later in life. For the really highly paid, pensions can only form a relatively small part of their retirement planning because of the £40K annual and £1.25M lifetime limits.

zagfles

EdSwippet wrote: »

Because their continued engagement is what is expected to pay for the uplift for BRT payers, from 20% to 30% or whatever flat rate deferral (excluding salary sacrifice muddying).

The Pensions Policy Institute report cites 30% as cost neutral assuming no behaviour change (their exact words). I suggest that some behaviour change is certain. The question is, how much, in what direction, and could it have the end result of making the 30% flat rate no longer cost neutral?

Eh? The more HRT payers opt out of pensions, the more the exchequer gains. So it would be a win for the govt coffers if they 'disengaged'.

Even on your calculations there's still a tax advantage to HRT payers even if they pay HRT in retirement, so a tax advantage foregone by an individual is a gain to the taxpayer.

Not to mention a massive short term gain by the govt, as they will be getting all that 40% tax now and not even have to pay out the 30% or whatever flat rate relief.

In fact the more I think about it, the more flat rate relief sounds like a winner both politically and fiscally. It'll be a nightmare to administer particularly for DB schemes, but that'll probably be seen as a small price to pay.

Linton

gadgetmind wrote: »

I know my boss *couldn't* and my switch to 4 days has caused widespread consternation and panic.

I heard it said once that a good manager should search his organisation for the really indispensible people....... and sack them. Its no good for the individual nor the company for someone to be indispensible. After retirement, I suspect you will find to your disappointment that you werent.

EdSwippet

tinter wrote: »

Also, bribe is very unfair. 40% relief when paying 42% overall is a fair incentive for higher rate tax payers, but 30% when paying 32% overall is a bribe? Come now.

Granted. Bribe is not a fair description.

What a shift to a 30% rate will do, then, is to put basic rate taxpayers into approximately the position that higher rate tax payers are in today -- that is, pension saving is broadly tax neutral plus or minus the PCLS -- by shifting the 'unfairness' from BRT payers to HRT payers.

tinter wrote: »

Even if the government takes a loss on the basic rate payers higher contributions, unlike with HRT payers it will eventually make some savings as this reduces future means tested payments and covers care costs that were previously paid by the government. Its for these reasons that the government has an interest in pensions, after all; increased BRT contributions are a good thing net.

Agreed, but I don't think the government is being as altruistic here as you suggest. What it really wants is money now, rather than reduced costs later. Today's money funds the current government's pet projects. A net saving tomorrow benefits a future government, but not this one.

It seems there is an assumption among many here that HRT payers will simply 'lump it' rather than move to part time work, low level freelancing, or earlier retirement in response to a decrease in effective compensation from employment. I'm not so sure about that. Not least because there have already been a handful commenters here, myself included, who are taking precisely these actions.

Linton

EdSwippet wrote: »

It seems there is an assumption among many here that HRT payers will simply 'lump it' rather than move to part time work, low level freelancing, or earlier retirement in response to a decrease in effective compensation from employment. I'm not so sure about that. Not least because there have already been a handful commenters here, myself included, who are taking precisely these actions.

So HRTs will say: "The government is cutting my income. I know what I'll do to show them - I'll cut it even further!"

Yes, some may decide to retire slightly earlier than they otherwise would have done but I am sure there will be plenty of BRTs keen to take their place. Most HRTs wont yet be in a position to retire early.

EdSwippet

zagfles wrote: »

Eh? The more HRT payers opt out of pensions, the more the exchequer gains. So it would be a win for the govt coffers if they 'disengaged'.

Suppose they opt out in ways other than simply continuing to work for the same salary but with a higher tax bill?

All tax increases -- which is what this would be on HRT payers -- lead to behavioural changes that reduce the effect of the tax increase below its mechanical level.

EdSwippet

Linton wrote: »

Yes, some may decide to retire slightly earlier than they otherwise would have done but I am sure there will be plenty of BRTs keen to take their place.

I am retiring early, but no BRT payer will (or could) take my place. In fact, my job will now be done by someone living in a different country entirely.

zagfles

EdSwippet wrote: »

Suppose they opt out in ways other than simply continuing to work for the same salary but with a higher tax bill?

All tax increases -- which is what this would be on HRT payers -- lead to behavioural changes that reduce the effect of the tax increase below its mechanical level.

Some might (negative fiscally), others might use pensions less (positive fiscally), others might think 30% relief is still worth having (positive fiscally).

What's the effect of the reduced AA for those on £150k+? That was already tried in around 2009/10. This govt copied Labour's idea. It looks like they're not too worried about reducing the pension tax perks for high earners.

tinter

EdSwippet wrote: »

What a shift to a 30% rate will do, then, is to put basic rate taxpayers into approximately the position that higher rate tax payers are in today -- that is, pension saving is broadly tax neutral plus or minus the PCLS -- by shifting the 'unfairness' from BRT payers to HRT payers.

Not really, partly simply because its flat and therefore the treatment is not differential.

Secondly, because as I have stated repeatedly, 7 out of 8 of HRT payers pay ONLY basic rate tax in retirement. A substantial proportion of the remaining 1 in 8 naturally pay mostly basic rate tax. What this actually resulted in was the majority of HRT payers actually paying less than 20% net tax on their pension contributions total (where basic rate tax payers pay 27%), which is obviously grossly unfair, deeply expensive to the treasury and which you have chosen not to address in favour of discussing only around the top 1% of population (probably disproportionately represented on a board which regularly discusses very early retirement). Higher rate tax relief is nowhere near cost neutral at present, it is a massive expense and tax break for the overwhelming majority, not a deferral.

Furthermore, the fact that only 1/8 HRT payers are saving pensions above the HRT threshold suggests most are not about to stop working in response to excessive wealth. A small minority (possibly disproportionately skilled) may retire slightly earlier, but it does not seem that preventing this is either a) a good justification for the shape of an entire national pension system b) cost-effectively achieved through a) or c) that the numbers would be large enough for this to be a primary governmental level concern.