FT - Tories to raid tax relief pensions

zagfles

I think something might happen this time. There are at least 2 problems the govt have promised to sort, the AA taper for high earners and the net pay trap for low earners (where they don't get tax relief cos they don't pay tax).

Both could be solved with a flat rate relief at 25% but paid as a RAS style top up for everyone, so eg if you have a personal pension, you pay £75 net and that's topped up by £25 by HMRC, similar to now but a bit more generous, or if you're in a net pay scheme, instead of your £100 contribution reducing your taxable income and giving you £20 back, you pay £75 net and that's topped up by £25 in the same way as RAS. Taxable income is not reduced by the contribution. That would solve the "net pay" trap and also give a greater incentive to basic rate taxpayers to contribute more.

Employer contributions are always the issue with flat rate relief - the pure solution would be to make them a taxable benefit and subject to the same RAS top-up, but that would be ridiculously complicated, particularly for DB schemes. A simpler way would be to simply limit employer contributions/DB accrual to a reasonable high level, similar to the most generous DB schemes. At say 1/40th accrual for DB and 40% of taxable income for DC. Very few pension occupational schemes are more generous than that. Anything more generous is allowed but becomes a taxable BIK. 

So there would be scope for limited sal sac to retain a bit of the higher rate relief, eg someone in a DC scheme with 10% employer conts could sal sac about 21%, but it would prevent excessive contributions and as such the AA would probably no longer be needed.

Even better, the LTA would no longer be needed. Currently the LTA "penalty" for most people is 15% - the difference between 40% tax relief and the 55% AA charge (or 25% income charge combined with 40% tax, which makes 55%). Well, with flat rate, exactly the same "penalty" applies. If you end up on higher rate tax in retirement, you pay 40% tax when you only got 25% relief. Same 15% penalty. So the higher rate threshold takes over from the LTA as the disincentive to build up a very large pot.

The system simplified, no AA, no LTA. So the doctor's AA taper issue solved. Higher earners can still get a limited amount of higher rate relief through sal sac, low earners get more tax relief. The PCLS should still be limited at about £260k, perhaps frozen at that level forever as it's pretty generous.

lisyloo

When you say this time? You mean for 6th April? !!!!
thats not a lot of notice.
i can only change my pension contributions at certain times of year so I don’t think my company would be able to react before April.

or did you mean announced now for future tax years?

MK62

If they have any sense they will announce that they are looking into it with a view to introduce changes for TY21/22, and then consult all the various players and consider all the differing points of view before coming to a balanced decision.........but then we are talking about the government....

lisyloo

I don’t think those kind of changes generally come through very quickly.
they take a lot of time, usually many years of consultation, but as you say it’s wouldn’t be totally surprising for something to come out of left field.
i think there would be huge amounts of criticism about notice though.
some people have already complained and there have been judicial reviews where people have had decades. 

EdSwippet

MK62 said:

If they have any sense they will announce that they are looking into it with a view to introduce changes for TY21/22, and then consult all the various players and consider all the differing points of view before coming to a balanced decision ...

If they run true to form, they will announce that they are looking into it with a view to introduce changes for TY21/22, and then consult all the various players and consider all the differing points of view before entirely ignoring the results of the consultation and just doing what they planned to do all along.

Albermarle

zagfles said:

I think something might happen this time. There are at least 2 problems the govt have promised to sort, the AA taper for high earners and the net pay trap for low earners (where they don't get tax relief cos they don't pay tax).

Both could be solved with a flat rate relief at 25% but paid as a RAS style top up for everyone, so eg if you have a personal pension, you pay £75 net and that's topped up by £25 by HMRC, similar to now but a bit more generous, or if you're in a net pay scheme, instead of your £100 contribution reducing your taxable income and giving you £20 back, you pay £75 net and that's topped up by £25 in the same way as RAS. Taxable income is not reduced by the contribution. That would solve the "net pay" trap and also give a greater incentive to basic rate taxpayers to contribute more.

Employer contributions are always the issue with flat rate relief - the pure solution would be to make them a taxable benefit and subject to the same RAS top-up, but that would be ridiculously complicated, particularly for DB schemes. A simpler way would be to simply limit employer contributions/DB accrual to a reasonable high level, similar to the most generous DB schemes. At say 1/40th accrual for DB and 40% of taxable income for DC. Very few pension occupational schemes are more generous than that. Anything more generous is allowed but becomes a taxable BIK. 

So there would be scope for limited sal sac to retain a bit of the higher rate relief, eg someone in a DC scheme with 10% employer conts could sal sac about 21%, but it would prevent excessive contributions and as such the AA would probably no longer be needed.

Even better, the LTA would no longer be needed. Currently the LTA "penalty" for most people is 15% - the difference between 40% tax relief and the 55% AA charge (or 25% income charge combined with 40% tax, which makes 55%). Well, with flat rate, exactly the same "penalty" applies. If you end up on higher rate tax in retirement, you pay 40% tax when you only got 25% relief. Same 15% penalty. So the higher rate threshold takes over from the LTA as the disincentive to build up a very large pot.

The system simplified, no AA, no LTA. So the doctor's AA taper issue solved. Higher earners can still get a limited amount of higher rate relief through sal sac, low earners get more tax relief. The PCLS should still be limited at about £260k, perhaps frozen at that level forever as it's pretty generous.

Very good ideas to make the system simpler and fairer,  but it is not clear whether these types of changes will bring the government more revenue , which presumably is the main motivation. 

ffacoffipawb

The biggest risk to private pensions (confiscatory socialism) was kicked into touch on December 12th, hopefully for many decades.

Mick70

The system dies need to be a lot clearer IMO.  I found it a surprise as a 40% tax payer that you get the govt paying into your pot tax relief AND you can claim another 20% back through your annual tax returns (I think I’m right , this is my first year paying into a DC scheme ) . Yet lower earners don’t get this perk .  It would be easier and create more govt income to scrap that perk and scrap the LTA .  It’s all a bit confusing but can see it coming 

Dazed_and_C0nfused

You cannot claim "another 20% back".

A relief at source contribution simply increases the amount of your basic rate band.  Which in turn can reduce the amount of higher rate tax payable. 

There is no fixed extra 20%.

The contributions may give an additional 20% tax saving to some higher rate payers but you don't automatically get 20% back.  Some will effectively save an additional 40+% but others might save very little or nothing in some cases.

tetrarch

MK62 said:

I don't agree with the guy from the IFS, at least in the face of it anyway, who suggested abolition of the tax free lump sum would be a better reform.......though the article did not expand on his reasoning.

This is an obvious target. The TFLS is definitively "lost" income for the government. My view is that they will cap this - essentially giving a much smalller tax-free sum. This will keep the reward incentive for lower-rate tax payers. It will certainly play well as a rich/poor divide closure measure as the bulk of the pain will be felt by HRT

I am going to be a bit cynical here - whilst this will be a kick in the teeth for HRT, it will undoubtedly be sold as a consumer  protection measure to compensate for the buyers regret that kicks in for those people who took the cash and threw away an annuity income and then later find themselves in tighter financial circumstances than they intended.

Regards

Tet