FT - Tories to raid tax relief pensions

zagfles

EdSwippet said:

Amoux said:

It doesn't change the fact that we have a perverse pension system ...

... which is an entirely natural consequence of a perverse tax system that produces extreme tax rates for spikes in income.

Yes and those spikes happen at lower incomes too, for instance withdrawal of tax credits etc

zagfles

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?

A progressive tax system without the 'escape valve' of pensions for smoothing income will make it much more worthwhile for these folk to instead buckle down into a safe (government pensioned?) job, rather than create companies that will ultimately employ others and grow the country's economy.

If you aren't one of the folk gaining 40% or higher tax rate deferral on your own pension contributions, instead of whining that others are, maybe consider working more or gaining a promotion so that you too can then spread your higher lifetime tax over more years than is otherwise possible.

So how does pension tax relief help them in those early years? It gives no help at all with bumpy earnings if the low earning years are before they can draw on the pension, or before there's anything in the pension!

EdSwippet

zagfles said:

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?

A progressive tax system without the 'escape valve' of pensions for smoothing income will make it much more worthwhile for these folk to instead buckle down into a safe (government pensioned?) job, rather than create companies that will ultimately employ others and grow the country's economy.

If you aren't one of the folk gaining 40% or higher tax rate deferral on your own pension contributions, instead of whining that others are, maybe consider working more or gaining a promotion so that you too can then spread your higher lifetime tax over more years than is otherwise possible.

So how does pension tax relief help them in those early years? It gives no help at all with bumpy earnings if the low earning years are before they can draw on the pension, or before there's anything in the pension!

Carry forward is one way, albeit limited. In practice of course, the major benefit comes from being able to smear the spikes in income over later years, after age 55 (or 57, if the government again moves the goalposts, as it has indicated it will do).

The current system simply does not fit well with many people's earnings and spending profile. It's not too bad for final salary schemes, which of course the people making the rules all have; although even here we can see it fraying badly at the edges, for example the NHS problem caused by the ridiculous annual allowance taper.

For many use cases though, it's already bad. You might not be able to prioritise pension saving over paying down a mortgage and raising kids, and then once those are done you can easily find that you are unable to pay into a pension efficiently, even though you now have the disposable income, because of nonsense like the allowance taper.

Pensions are deferred income, and a basic rule of tax on income is that it should only be due when income is realised. Crimping pension tax deferral to 20% breaks that. It simply boils down to double-taxing the pensions of higher rate taxpayers, and as such has no coherent rationale behind it. The fallout from it would make the current NHS pensions furore look tiny in comparison.

zagfles

EdSwippet said:

zagfles said:

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?

A progressive tax system without the 'escape valve' of pensions for smoothing income will make it much more worthwhile for these folk to instead buckle down into a safe (government pensioned?) job, rather than create companies that will ultimately employ others and grow the country's economy.

If you aren't one of the folk gaining 40% or higher tax rate deferral on your own pension contributions, instead of whining that others are, maybe consider working more or gaining a promotion so that you too can then spread your higher lifetime tax over more years than is otherwise possible.

So how does pension tax relief help them in those early years? It gives no help at all with bumpy earnings if the low earning years are before they can draw on the pension, or before there's anything in the pension!

Carry forward is one way, albeit limited. In practice of course, the major benefit comes from being able to smear the spikes in income over later years, after age 55 (or 57, if the government again moves the goalposts, as it has indicated it will do).

The current system simply does not fit well with many people's earnings and spending profile. It's not too bad for final salary schemes, which of course the people making the rules all have; although even here we can see it fraying badly at the edges, for example the NHS problem caused by the ridiculous annual allowance taper.

For many use cases though, it's already bad. You might not be able to prioritise pension saving over paying down a mortgage and raising kids, and then once those are done you can easily find that you are unable to pay into a pension efficiently, even though you now have the disposable income, because of nonsense like the allowance taper.

Pensions are deferred income, and a basic rule of tax on income is that it should only be due when income is realised. Crimping pension tax deferral to 20% breaks that. It simply boils down to double-taxing the pensions of higher rate taxpayers, and as such has no coherent rationale behind it. The fallout from it will make the current NHS pensions furore look tiny in comparison.

Right, carry forwards helps but you still can't spread earnings back over low earning years, as you can forwards over post retirement years, so you still waste personal allowaance/basic rate bands of early low earning years.

Restricting higher rate relief will cause nothing like the AA taper problems. It will still be worthwhile for higher rate taxpayers to pay into a pension, it won't reduce incentives to work in the same way except for those who are currently ploughing in massive amounts, which most people don't. Higher rate relief has been removed from loads of other stuff, double, or even triple, taxation is already here with the AA and LTA. Flat rate relief could mean the AA and LTA could be abolished.

EdSwippet

zagfles said:

Restricting higher rate relief will cause nothing like the AA taper problems. It will still be worthwhile for higher rate taxpayers to pay into a pension, it won't reduce incentives to work in the same way except for those who are currently ploughing in massive amounts, which most people don't. Higher rate relief has been removed from loads of other stuff, double, or even triple, taxation is already here with the AA and LTA. Flat rate relief could mean the AA and LTA could be abolished.

Well, I disagree. Restricting higher rate tax relief will, at the margins, lead to higher rate taxpayers opting out of pensions, restricting work, working part time, not taking promotions and so on, because the time off then becomes more valuable to them than (potentially less than half of) the money earned. We already see the thin end of this with the problems the taper causes in the NHS, and there's no reason at all to believe that it wouldn't apply more widely.

That current double- and triple-tax from the AA and the LTA can already exist for some edge cases is not a reason to worsen things further, and for a far larger number of people. You do not resolve a headache for a small group by simply making it a headache for a much larger one.

JoeCrystal

badmemory said:

As a lot more people have pensions now than did a few years ago, then surely more people are likely to inherit than in the past?  We need to remember that whilst some people had DB pensions many more didn't, especially women.

Indeed, there was an Automatic enrolment evaluation report that came out yesterday which explored the numbers, and the number of private sector active employees in workplace pension scheme went from 1 million in 2012 went up to 10 million in 2018. It was depressing to recall just how dire the pension provision in the private sector was back then. I remembered that I was told that the Stakeholder pension was available but no employer's contribution back in 2010. There was no information about it in the contract or handbook, so you have to ask. 

Anonymous101 said:

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!

I agreed, especially on pensions! Few people at work often say that they cannot afford the pension contribution of £40 per month. I try to explain it will be like taking a pay cut and that by paying £40 per month take-home pay, it becomes £80 per month gross thanks to the tax relief and employer contributions, but they are not interested and much rather see that extra cash in their pocket.

MK62

JoeCrystal said:

badmemory said:

As a lot more people have pensions now than did a few years ago, then surely more people are likely to inherit than in the past?  We need to remember that whilst some people had DB pensions many more didn't, especially women.

Indeed, there was an Automatic enrolment evaluation report that came out yesterday which explored the numbers, and the number of private sector active employees in workplace pension scheme went from 1 million in 2012 went up to 10 million in 2018. It was depressing to recall just how dire the pension provision in the private sector was back then. I remembered that I was told that the Stakeholder pension was available but no employer's contribution back in 2010. There was no information about it in the contract or handbook, so you have to ask. 

Anonymous101 said:

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!

I agreed, especially on pensions! Few people at work often say that they cannot afford the pension contribution of £40 per month. I try to explain it will be like taking a pay cut and that by paying £40 per month take-home pay, it becomes £80 per month gross thanks to the tax relief and employer contributions, but they are not interested and much rather see that extra cash in their pocket.

True, and when it's then further pointed out that the £40pm from their salary, even doubled by relief and ER contribution, will actually buy a pittance pension come retirement, many just shrug and say "what's the point then"?

zagfles

EdSwippet said:

zagfles said:

Restricting higher rate relief will cause nothing like the AA taper problems. It will still be worthwhile for higher rate taxpayers to pay into a pension, it won't reduce incentives to work in the same way except for those who are currently ploughing in massive amounts, which most people don't. Higher rate relief has been removed from loads of other stuff, double, or even triple, taxation is already here with the AA and LTA. Flat rate relief could mean the AA and LTA could be abolished.

Well, I disagree. Restricting higher rate tax relief will, at the margins, lead to higher rate taxpayers opting out of pensions, restricting work, working part time, not taking promotions and so on, because the time off then becomes more valuable to them than (potentially less than half of) the money earned. We already see the thin end of this with the problems the taper causes in the NHS, and there's no reason at all to believe that it wouldn't apply more widely.

That current double- and triple-tax from the AA and the LTA can already exist for some edge cases is not a reason to worsen things further, and for a far larger number of people. You do not resolve a headache for a small group by simply making it a headache for a much larger one.

It's swapping a migrane experinecd by a few, crucial people like doctors, to a slight headache experienced by a greater number. For most, it'll make no difference to their behaviour. For a few, you might be right, but equally others may delay their retirement as it means they can't afford to retire for another year or 2. Only a fool would stop pension contributions completely just because higher rate relief had gone, unless they expecting to pay higher rate tax in retirement in which case they'd currently likely be hit by the LTA anyway. The incentive would be the same as it currently is for basic rate payers. And if they did, why would the govt care? Unlikely many would end up relying on welfare in retirement.

Sailtheworld

I've been a higher rate taxpayer for 20 years. I'm pretty sure that for every budget of those years there has been speculation that higher rate relief was definitely being withdrawn. You can imagine my surprise when it turned out that, as per the previous two decades, it's not going to happen this year either.

It's ruse used every year to try and justify an increase in taxes elsewhere. It seems this year taxes on petrol will increase to pay for the retention of the relief. Doesn't anyone ever wonder why, when one tax remains the same, another tax needs to increase to compensate?

Paul_Herring

Doesn't anyone ever wonder why, when one tax remains the same, another tax needs to increase to compensate?

Not at all. It's well known that the government is incapable of spending less of other people's money - see ways 3 and 4 of spending money here: https://m.signalvnoise.com/milton-friedman-on-the-four-ways-you-can-spend-money/