FT - Tories to raid tax relief pensions

EdSwippet

MK62 said:

Should someone on £80k pa pay the same tax (and possibly NI too) as someone on £44k, simply because they shove 10x more into their pension?

Except that they don't "pay the same tax". The £34k they 'shove' into a pension will very likely be taxed(*) when withdrawn. Moreover, the tax receipt at that point will be significantly higher, because over time it will have grown through investment.

(*) Modulo distortions like the 25% PCLS and the fact that pensions are IHT bypasses. In the first case, the LTA puts a de facto limit on the PCLS, albeit currently a high one. In the second, I suspect it's just a matter of time before the government changes the rules here.

crv1963

EdSwippet- I agree that the IHT bypass will likely go at some point except for spouse, (like property). Letting spouse inherit tax free allows spouse to then pay for care in old age from income and the rest falling into the estate on death of surviving spouse.

Anonymous101

Agree CRV. We live in a bubble on here at times. In the real world the lack of interest, understanding and priory when it comes to pensions and general personal finance is staggering!

MK62

Paul_Herring said:

but more progressive measures are long overdue imho - should the government really be giving more tax relief to the better off

It's not tax relief, it's tax deferral.

Should it cost more for 40%ers to put a quid into a pension than a 20%er? Currently it costs both £1 to put £1 in. Are you suggesting it should cost the 40% taxpayer more than £1 to put  £1 in?

Call it what you will, but it IS tax relief.........ie money you would pay 40% tax on if you didn't put it into a pension.....ergo you are relieved from paying that 40% tax.
Yes, there is an element of deferral.....there is for everyone, but it may well be only partial deferral....... 

As for cost......putting £1 into a pension costs a BR taxpayer 80p, and a HR taxpayer 60p - the cost should be the same for everyone - are you suggesting it should be cheaper for high earners now, just in case they end up being a HR tax payer in retirement.
Fast forward to withdrawal, and they will both pay the same rate of tax on up to £50000-£66667 of annual pension - those on more will pay higher rate tax.......that's the progressive nature of the income tax system.

Thrugelmir

EdSwippet said:

Amoux said:

I look forward to hearing your argument for why somebody on a variable income, say £0 in year one and £100k in year two, should be forced to pay a much higher total tax bill that someone on a steady income of £50k in years one and two. Because as of now, the only way to balance these two out in the UK tax system is to use a pension.

I am still waiting for you to answer this.

I think it is perfectly justifiable. We have tax years and everyone is entitled to personal allowance each year. For one, it keeps things simple for the vast majority of people. No one is treated differently on this point. If you have literally no income in year 1 you have knowingly forfeited your personal allowance and a years worth of income in which you are assessed.

The tax system is not there to smooth out peoples bumpy earnings, and the pension system is not designed for that purpose either. Giving an extreme example is not in any way justifiable why higher rate tax payers should have more pension incentives, particulart when the main thrust of pensions is to avoid people becoming reliant on means-tested benefits in their retirement.

Except this isn't a particularly extreme example. How about entrepreneurs, who may spend several years at low or zero salaries to build up a business that will later bring them a higher income?

Isn't a reduced rate of CGT (10%) on the first £10m of gain sufficient incentive. 
Changes to tax relief on BTL interest was due to the avoidance it offered. 

EdSwippet

Thrugelmir said:

Isn't a reduced rate of CGT (10%) on the first £10m of gain sufficient incentive. 

Apples to oranges comparison. That's what you might get if/when you can eventually sell the business. Not what you face if you remain working in it and taking a salary.

If you don't like the entrepreneur example, here's a different one. You work for a company for five years, after which they pay you a bonus in (say) stock options for good service. Even though you effectively earned it over five years, the entire bonus is paid out in a single year. Why should this case not be allowed any way of smoothing that income over multiple years? Pensions are the only route to accomplish this.

Paul_Herring

As for cost......putting £1 into a pension costs a BR taxpayer 80p, and a HR taxpayer 60p

Both have their gross pay reduced by £1, therefore it cost them £1.

MK62

Paul_Herring said:

As for cost......putting £1 into a pension costs a BR taxpayer 80p, and a HR taxpayer 60p

Both have their gross pay reduced by £1, therefore it cost them £1.

Really?......what about those who pay into a SIPP?

Thrugelmir

EdSwippet said:

Thrugelmir said:

Isn't a reduced rate of CGT (10%) on the first £10m of gain sufficient incentive. 

Apples to oranges comparison. That's what you might get if/when you can eventually sell the business. Not what you face if you remain working in it and taking a salary.

Growing companies require capital. Few start ups are capable of paying a high level of remuneration while retaining sufficient cash to grow the business organically. 

zagfles

Amoux said:

I wasn't expecting higher tax relief to be scrapped. Too many self-serving tories would be up in arms. Instead they are floating the idea of rising fuel duty - that would be a nice way to hit low-to-middle income earners the most. Surprise, surprise. 

It doesn't change the fact that we have a perverse pension system that gives more tax break incentives to those who have more means to fund their retirement. The costs of which are huge and rising year on year. 

You might want to check the history of stuff like pensions and fuel duty before trotting out tired old stereotypes. Fuel duty has gone down in real terms since 2010, it was rising under Labour. In fact Labour even had a fuel duty escalator until the fuel strikes put a stop to it.

Under Labour of course there was no attempt to cut higher rate pension relief, in fact they vastly increased the amount people could put into a pension, (the 2006 "A-day" changes) from around 15-25% of earnings depending on what kind of scheme and age, to 100%. They set the annual allowance at over £200k and the lifetime allowance at £1.5 million, rising to £1.8 million in 2010. They really looked after their rich mates!

Then those nasty Tories/coalition cut the AA down to £40k and the LTA down to £1 million. Also introduced the AA taper which reduces the AA for those earning over £150,000 pa inc pension, which has caused problems in the NHS as doctors are losing out (or gaining hardly anything) working overtime especially when combined with the LTA.

So it wouldn't be a surprise to see the Tories cut higher rate relief. They're carrying on shafting the well off. They've got their new working class Northern mates to look after, sod the "rich"!

Or as a compromise, it could be they'll undo some of Labour's A-day changes, eg restricting the amount people can contribute to a similar % of earnings as pre 2006, or perhaps as I mentioned earlier abolishing higher rate relief but still allowing limited sal sac so most "normal" levels of contributions are allowed, but excessive levels aren't (or are allowed but without full tax relief).

But they do need to help out some of their "rich mates", for instance doctors, by getting rid of or amending the AA taper as that's created huge disincentives which is having a real impact on the NHS and so affecting those on more ordinary incomes.