FT - Tories to raid tax relief pensions

badmemory

I suspect it may happen fairly quickly, then we can await the law of unintended consequences.  This gov have a big problem with the NHS.  If they can find a way of getting rid of the LTA without losing too much face, then I think they may well go for it.  They will hope to stop doctors retiring early & hopefully cause some to un-retire or return to full time.  The LTA is not on most peoples radar so they will soon forget about that & just say how marvellous that the number of doctors has increased.

kinger101

If it goes ahead (and that's a big if) the devil will be in the detail.  I hope it wont for purely selfish reasons, but I could foresee that it will have negative consequences.  They'd have to do something with salary sacrifice too, otherwise it's easily circumvented by the employer making the contribution.

For a basic rate "relief" outside of salary sacrifice, the current benefit is just 6.25% as that 80 p becomes worth 85 p when drawn.  This assumes that the income tax rate is the same in the future, and the TFLS remains at 25%.  Far from safe assumptions.  Particularly just after the government signals it's willing to change the pensions system to raise revenue.  It would seem more likely to me that you'd pay a higher rate of tax in the future than if you just put it in an ISA.  

Contrast this with the 68 p (BR + SS), 60 p (HR) , 58 p (HR + SS) or 48 p * costs of that 85 p under the current regime, and is hard to see someone getting a 25% to 77% immediate uplift in value not questioning whether a highly tentative 6.25% is worthwhile.

People would either save less in pensions, needing more assistance from the state when their pots run out.  Or need to save so much more to make up the difference that discretionary spending would fall.

*for those able to get 40% IT and 12% NI reduction due to timing differences 


 

Mick70

Dazed_and_C0nfused said:

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.

Apologies if I was wrong . I thought when you fill in your annual tax return you include how much pension paid and thus then reduces your tax liability (or increases any tax refund )

Mick70

I’m referring to 40% tax payers 

Dazed_and_C0nfused

Mick70 said:

Dazed_and_C0nfused said:

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.

Apologies if I was wrong . I thought when you fill in your annual tax return you include how much pension paid and thus then reduces your tax liability (or increases any tax refund )

It may well reduce it or increase any refund but if you only paid higher rate tax on £1 then increasing your basic rate tax band is only going to save you paying 20p* in higher rate tax even if you paid say £5,000 into the pension.
*21p if Scottish resident for tax purposes.

And some people classed as higher rate taxpayers don't actually pay any higher rate tax.  This usually happens if you are higher rate payer for the purposes of calculating the savings nil rate of tax (aka PSA) and then all the savings interest is taxed at 0% (within the 40% tax band) with no earnings or pension income needing to be taxed at higher rates.

Albermarle

I thought when you fill in your annual tax return you include how much pension paid and thus then reduces your tax liability (or increases any tax refund )

The issue is that it depends on how much HRT you pay and how much your pension contribution is .

For example if you earn £55K and contribute £15K in a relief at source scheme . Pension provider adds basic rate tax relief .

If you then claim higher rate relief you do not get it on £15K but only on the £5K you have paid HRT on .

So there is no automatic payment of an extra 20% , it depends on your overall tax position.

MK62

EdSwippet said:

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.

Haha - a cynical view Ed .......but it wouldn't really surprise....

Dox

tetrarch said:

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

Just think of all those civil servants who have built up pensions with automatic lump sums through being in the PCSPS...

drummersdale

Dox said:

tetrarch said:

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

Just think of all those civil servants who have built up pensions with automatic lump sums through being in the PCSPS...

The COnservatives have never exactly been big fans of the PSCPS so nothing they do to erode it further would surprise me - especially if they thought it was a branch of the magic money tree.....

hugheskevi

Dox said:

Just think of all those civil servants who have built up pensions with automatic lump sums through being in the PCSPS...

Just bringing them into line with the more recent public service pension schemes, where tax free lump sums have already effectively been abolished through penal commutation rates.

More sympathy might go out to the far greater number of doctors and nurses who have pension rights under the 1995 scheme which includes an automatic lump sum.

The PCSPS includes classic, classic plus, permium and nuvos - it is only classic and classic plus which include automatic lump sums.