One-off contribution help - so unfair!!

ratechaser

OldBeanz wrote: »

I think anyone using an internet forum that declared an income 8/9 times more than the national average, stating that tax is unfair and who asked for comments on his "individual position" may be pointed in the direction of those who are struggling to meet their basic needs.

Stating facts in order to gain advice on an investment strategy isn't unreasonable. Nor is making a complaint about just how badly handled pension rules have been over he past few years (although TBH you could go back further than that...).

I suppose though that the fact that the OPs tax bill is already likely to be a multiple of the national average salary won't cut any ice, as there are those that won't be happy until the 'rich' are taxed at 98% and have to turn up to the HMRC office in sackcloth and ashes to pay their dues in person... :doh:

westv

OldBeanz wrote: »

I think anyone using an internet forum that declared an income 8/9 times more than the national average, stating that tax is unfair and who asked for comments on his "individual position" may be pointed in the direction of those who are struggling to meet their basic needs.

Should the person who has an bad ache in their leg not complain because others have had an amputation?

Alan_Brown

Does anyone know if this legislation will actually go through? It's certainly been mooted for at least 10 years to my knowledge and is rolled out every January/February by various pension providers, seemingly as a device to get people to panic and throw a ton of money into their pension pots?

If it was approved, would it be such a bad thing? There are many more lower paid employees than higher paid and anything the government can do to incentivise pension contributions would be a good thing. Higher paid employees are more likely to be employed in a profession where their companies contribute to an equal or greater amount, so already have that incentive.

If the government introduced a flat rate of, say 30% then lower paid employees who may have very little in the way of employer contributions will benefit greatly. Higher paid employees will continue to receive their employer contributions and will still be better off from a tax perspective than putting money into an ISA.

It seems to be a 'win win' situation to me. A wider range and greater number of people contribution to pensions and the reduction of an anomaly where it was cheaper for higher rate tax payers to save for a pension than lower rate tax payers. Social democracy in action.

PensionTech

Does anyone know if this legislation will actually go through? It's certainly been mooted for at least 10 years to my knowledge and is rolled out every January/February by various pension providers, seemingly as a device to get people to panic and throw a ton of money into their pension pots?

There's too much smoke this time. At a minimum I think salary sacrifice will be scrapped - but I strongly suspect that a flat rate is on its way.

If it was approved, would it be such a bad thing? There are many more lower paid employees than higher paid and anything the government can do to incentivise pension contributions would be a good thing. Higher paid employees are more likely to be employed in a profession where their companies contribute to an equal or greater amount, so already have that incentive.

Depends on your personal and political perspective. What I think can be objectively stated, though, is that public confidence in pensions is very low and more government tampering is unlikely to reassure people that they can safely lock their money away for decades and know what they're going to get back at the end. It is not that the general public fully understands the current system and doesn't think pensions are good value for money. It is that the public doesn't know anything about why pensions are good value for money. and doesn't trust the stability of either the financial institutions who look after pensions, or the governments who legislate for them.

If the government introduced a flat rate of, say 30% then lower paid employees who may have very little in the way of employer contributions will benefit greatly. Higher paid employees will continue to receive their employer contributions and will still be better off from a tax perspective than putting money into an ISA.

Not so. First of all, as this will probably accompany the ditching of salary sacrifice, the large number of BR taxpayers currently receiving in effect 32% combined tax/NI relief will lose out from a move to 30% or lower (and the figures I most frequently see suggested are closer to 25%). Secondly, HR taxpayers will lose out if they are HR taxpayers in retirement. I'm not saying necessarily that my heart bleeds for those who are lucky enough to be HR taxpayers in retirement - but they are certainly not winners.

Another issue is that as soon as you decouple the incentive from tax relief, and turn it into a rebate instead, it becomes just another figure - a benefit, even - to be cut whenever the government can't meet its over-optimistic targets. It is a particularly easy victim because there is less interest in pensions for obvious reasons; those about to receive their pensions don't need to worry about changes to contribution rules, and those affected by contribution rules have a long time before it actually starts to affect their lifestyle. So 30% today may be 25% in five years.

It seems to be a 'win win' situation to me. A wider range and greater number of people contribution to pensions and the reduction of an anomaly where it was cheaper for higher rate tax payers to save for a pension than lower rate tax payers. Social democracy in action.

Only if the results are what you predict. I think the impact on behaviours will be much more complex than that.

Triumph13

Whilst I will use the tax benefit to the hilt whilst it lasts, I see no problem at all with expecting 'the rich' to fund their retirements out of post-tax income. Given that 'the rich' are the same people paying all the tax in the first place, having a complicated merry-go-round of needing to tax them all more to pay for giving them tax relief seems pretty nonsensical. As part of this I have significant concerns of the LTA leading to behaviours where high earners maximise their relief until their pension is full then move to another country.
Scrap the LTA, drop the AA to £10k pa (and give the automatic right to have any employer's DC contributions above that as taxed income instead), and hopefully we can all quietly get on with our lives.

Alan_Brown

PensionTech wrote: »

There's too much smoke this time. At a minimum I think salary sacrifice will be scrapped - but I strongly suspect that a flat rate is on its way.



Depends on your personal and political perspective. What I think can be objectively stated, though, is that public confidence in pensions is very low and more government tampering is unlikely to reassure people that they can safely lock their money away for decades and know what they're going to get back at the end. It is not that the general public fully understands the current system and doesn't think pensions are good value for money. It is that the public doesn't know anything about why pensions are good value for money. and doesn't trust the stability of either the financial institutions who look after pensions, or the governments who legislate for them.



Not so. First of all, as this will probably accompany the ditching of salary sacrifice, the large number of BR taxpayers currently receiving in effect 32% combined tax/NI relief will lose out from a move to 30% or lower (and the figures I most frequently see suggested are closer to 25%). Secondly, HR taxpayers will lose out if they are HR taxpayers in retirement. I'm not saying necessarily that my heart bleeds for those who are lucky enough to be HR taxpayers in retirement - but they are certainly not winners.

Another issue is that as soon as you decouple the incentive from tax relief, and turn it into a rebate instead, it becomes just another figure - a benefit, even - to be cut whenever the government can't meet its over-optimistic targets. It is a particularly easy victim because there is less interest in pensions for obvious reasons; those about to receive their pensions don't need to worry about changes to contribution rules, and those affected by contribution rules have a long time before it actually starts to affect their lifestyle. So 30% today may be 25% in five years.



Only if the results are what you predict. I think the impact on behaviours will be much more complex than that.

Thanks for taking the time to write such an informative post. I see what you mean about the salary sacrifice hitting BR taxpayers due to NI payments. This makes me think its unlikely that the government will just scrap SS schemes without also implementing the flat tax relief. It would disproportionately hit BR taxpayers and not look good in the press. Much better to *seem* to hit HR taxpayers by reducing their tax relief.

I'm currently contributing 14% of my salary to a company scheme, comprised of 7% employer, 3% employee and 4% additional contributions. This is within a salary sacrifice setup. My plan was to increase my contributions at a rate of 1% per tax year, so I'd be looking at go to 15% contributions in April.

If this change does come through, I'm assuming it'd still make sense to contribute the additional 4% (5% in April) to the pension for tax relief (I'm a 40% taxpayer who will be a BR taxpayer when I retire)?

Or should I take this as salary and put it into an ISA? While I understand there is no tax relief with an ISA, there would be much more flexibility and so the decision line between the two would certainly be narrower.

zagfles

Triumph13 wrote: »

Thanks Ed, I had misunderstood that one. I have to admit I can't understand why on earth they would give an allowance for the short period that was twice the allowance for a normal year?

Because that 'short period' could include 2 pension input periods. Someone with a PIP ending 30 April would see all their contributions from 1 May 2014 to 30 April 2015 counted in the pre-alignment mini-tax year, and also any contributions between 1 May 2015 and 8 July 2015.

Under the previous rules they could have contributed £40k in the PIP ending 30 April 2015 and then another £40k at the start of the next PIP in May/June 2015, without exceeding the AA or needing carry forwards. So an £80k AA was needed in the pre-alignment year to avoid retrospectively taxing people.

And by allowing just £40k of it to be carried forwards to the post-alignment mini tax year, they avoid people being able to take advantage of the transition too much, without retrospectively taxing people.

zagfles

PensionTech wrote: »

There's too much smoke this time. At a minimum I think salary sacrifice will be scrapped - but I strongly suspect that a flat rate is on its way.

How would you scrap sal sac? If an employer currently offers a salary of £35k and pension cont of £5k, would he be banned from offering a salary of £30k and a pension cont of £10k? Also sal sac is used for a lot of other stuff than just pensions. So I can't see it being scrapped, but employer pension conts could become a taxable benefit (with a govt top up of whatever the flat rate is).

Depends on your personal and political perspective. What I think can be objectively stated, though, is that public confidence in pensions is very low and more government tampering is unlikely to reassure people that they can safely lock their money away for decades and know what they're going to get back at the end. It is not that the general public fully understands the current system and doesn't think pensions are good value for money. It is that the public doesn't know anything about why pensions are good value for money. and doesn't trust the stability of either the financial institutions who look after pensions, or the governments who legislate for them.



Not so. First of all, as this will probably accompany the ditching of salary sacrifice, the large number of BR taxpayers currently receiving in effect 32% combined tax/NI relief will lose out from a move to 30% or lower (and the figures I most frequently see suggested are closer to 25%). Secondly, HR taxpayers will lose out if they are HR taxpayers in retirement. I'm not saying necessarily that my heart bleeds for those who are lucky enough to be HR taxpayers in retirement - but they are certainly not winners.

Another issue is that as soon as you decouple the incentive from tax relief, and turn it into a rebate instead, it becomes just another figure - a benefit, even - to be cut whenever the government can't meet its over-optimistic targets. It is a particularly easy victim because there is less interest in pensions for obvious reasons; those about to receive their pensions don't need to worry about changes to contribution rules, and those affected by contribution rules have a long time before it actually starts to affect their lifestyle. So 30% today may be 25% in five years.

Only if the results are what you predict. I think the impact on behaviours will be much more complex than that.

Which is why I think the govt will go for a simple model. Flat rate is incredibly complicated - employer pension conts have to be valued and probably become a taxable benefit, tax bills could be unknown and hard to work out. You have the prospect of taxing the same income twice.

There's all this talk about EET or TEE, well flat rate is, err,
E(with a rebate) E T(partially) for basic rate taxpayers, and
T(partially) E T(partially) for higher rate taxpayers.

Which is why my money's on a simpler system of:
scrapping the AA for DB,
scrapping the LTA for DC,
tapered much lower AA for DC which effectively limits the total tax relief (like they've already done for additional rate payers), so a higher limit for basic rate taxpayers say £15k, maybe £12k for higher rate payers, giving a bit under £5k total relief,
top up for basic rate taxpayers say 12% if they use personal pensions or net pay to an employer's scheme (none for sal sac as they already get NI relief).
Full marginal relief on contributions.
Sal sac & employer conts not an issue (other than counting towards the AA).
No PCLS, or perhaps a nominal one of £30k or so (existing 25% on current pension values preserved)
LTA for DB set at about £750k.
Those in both DC and DB, LTA reduced by DC conts £ for £

That would be truely EET. Much easier to understand and implement I think. Only thing is not sure what the fiscal equation would be. Would enough be saved from HRT payers no longer making big contributions?

People on 'normal' salaries (eg under 70k) making 'normal' pension conts (eg 15% employer plus employee) won't be affected. For DB, would need a lot of years and a high salary to be affected.

westv

Has this thread gone into acronym overdrive?

grey_gym_sock

princeofpounds wrote: »

The private pension system has been based for years on a system of deferred taxation.


This is very different conceptually to an incentive. Although it may function as one, by design.


All the salary kept in a pension is untaxed, yet taxed fully on the way out.

actually, some ppl do pay tax on the way in. if you don't have access to a salary sacrifice scheme, you pay NI. if you do, you don't. if you have SS, and your employer passes on employer NI savings, you do even better.

(and it's not fully taxed on the way out, because pensions are exempt from NI.)

so we already have a system of partial tax exemption for pension contributions. flat-rate relief would just be a different system of partial exemption.

and in many ways, a more logical one. there is certainly no reason why different rates of tax should apply depending on whether your employer offers a salary sacrifice scheme (and with no possibility of SS if you're self-employed). and for ppl who can't use salary sacrifice, it's bizarre that basic-rate taxpayers, who pay 32% in income tax + employee NI, should only be able to get out of paying 20% by paying into a pension, i.e. they still pay 12%; whilst higher-rate taxpayers, who pay 42%, can get out of paying 40%, i.e. they still pay 2%.

the only purpose served by taxing pension contributions more lightly than other earnings, that i'm aware of, is to encourage ppl to save a decent amount for their retirement. it is an incredibly expensive tax relief (it costs more than the MoD), and most of the cost benefits higher earners, who need much less encouragement to save for retirement, anyway. in the circumstances, flat-rate relief seems pretty logical to me. but only if the privileges of salary sacrifice schemes are eliminated at the same time.

however, this does raise practical issues with DB schemes, as a few ppl have said.