Telegraph reporting - pensions tax threat

sevenhills

Pension tax relief is quite generous when I can pay my entire yearly earnings into a SIPP and get tax relief. I may even do that the year before I retire.

Albermarle

Gary1984 said:

2nd_time_buyer said:

If it was me. I would:

1) abolish higher rate tax relief
2) abolish salary sacrifice on pensions
3) introduce a flat relief at 32% (i.e. the same as salary sacrifice at basic rate)

I am not sure if that is more or less affordable than the current system. If it is less, I would then be tempted to play around with the annual and lifetime allowance.

That would get rid of the two most bonkers things in the current system:
1) People who earn more (and arguably need it less) get more tax relief;
2) whether or not you can salary sacrifice pension contributions seems entirely arbitrary depending on employer.

1) It should really be thought of as tax deferral, not tax relief. HRT payers will pay tax on their pension eventually. The main advantage is that they can get relief at higher rate then pay tax on withdrawal at Basic rate. But similarly a basic rate earner can effectively pay no tax if they take withdrawals up to their tax free allowance + tax free element, so the benefit can be similar in the end for low and high earners. 

2) People need to be more switched on about salary sacrifice and weigh it up as part of their total benefits package and start demanding it from their employers. 

1) You are right , but the 'middle earners' at £40K ish probably get least benefit - no 40% tax relief and probably paying tax in retirement. The easiest way to reduce higher rate tax relief would be to reduce the annual allowance as the vast majority of those affected by this will be higher rate taxpayers . A lot simpler than fiddling around with the tax system .

2) SS is a loophole that should be closed. Not only does it reduce NI payments to the exchequer but some people also use it to claim child benefit when they are normally earning too much to do that. 

2nd_time_buyer

Albermarle said:

Gary1984 said:

2nd_time_buyer said:

If it was me. I would:

1) abolish higher rate tax relief
2) abolish salary sacrifice on pensions
3) introduce a flat relief at 32% (i.e. the same as salary sacrifice at basic rate)

I am not sure if that is more or less affordable than the current system. If it is less, I would then be tempted to play around with the annual and lifetime allowance.

That would get rid of the two most bonkers things in the current system:
1) People who earn more (and arguably need it less) get more tax relief;
2) whether or not you can salary sacrifice pension contributions seems entirely arbitrary depending on employer.

1) It should really be thought of as tax deferral, not tax relief. HRT payers will pay tax on their pension eventually. The main advantage is that they can get relief at higher rate then pay tax on withdrawal at Basic rate. But similarly a basic rate earner can effectively pay no tax if they take withdrawals up to their tax free allowance + tax free element, so the benefit can be similar in the end for low and high earners. 

2) People need to be more switched on about salary sacrifice and weigh it up as part of their total benefits package and start demanding it from their employers. 

1) You are right , but the 'middle earners' at £40K ish probably get least benefit - no 40% tax relief and probably paying tax in retirement. The easiest way to reduce higher rate tax relief would be to reduce the annual allowance as the vast majority of those affected by this will be higher rate taxpayers . A lot simpler than fiddling around with the tax system .

2) SS is a loophole that should be closed. Not only does it reduce NI payments to the exchequer but some people also use it to claim child benefit when they are normally earning too much to do that. 

Agreed regarding scrapping SS, although your "2" is somewhat contrary to "1"...

Middle earners at £40kish will also be the most hit by abolishing salary sacrifice. SS being worth 12% for basic rate taxpayers and only 2% for higher rate taxpayers.

I really can't see a palatable way of scrapping salary sacrifice without increasing basic rate tax relief. The telegraph article suggests replacing it with a flat rate of 30%, which is pretty close to the salary sacrificed basic rate (32%).

dunstonh

Salary sacrifice has gone from being a relatively insignificant cost to the Treasury to being a major one.    Mainly because of auto-enrolment.  
I believe it was looked into some years back but the problem with restricting it was differentiating what is a sacrifice and what is an employer contribution.  

2nd_time_buyer

... which is I guess is particularly an issue for DB pensions?

Bobziz

Albermarle said:

Gary1984 said:

2nd_time_buyer said:

If it was me. I would:

1) abolish higher rate tax relief
2) abolish salary sacrifice on pensions
3) introduce a flat relief at 32% (i.e. the same as salary sacrifice at basic rate)

I am not sure if that is more or less affordable than the current system. If it is less, I would then be tempted to play around with the annual and lifetime allowance.

That would get rid of the two most bonkers things in the current system:
1) People who earn more (and arguably need it less) get more tax relief;
2) whether or not you can salary sacrifice pension contributions seems entirely arbitrary depending on employer.

1) It should really be thought of as tax deferral, not tax relief. HRT payers will pay tax on their pension eventually. The main advantage is that they can get relief at higher rate then pay tax on withdrawal at Basic rate. But similarly a basic rate earner can effectively pay no tax if they take withdrawals up to their tax free allowance + tax free element, so the benefit can be similar in the end for low and high earners. 

2) People need to be more switched on about salary sacrifice and weigh it up as part of their total benefits package and start demanding it from their employers. 

1) You are right , but the 'middle earners' at £40K ish probably get least benefit - no 40% tax relief and probably paying tax in retirement. The easiest way to reduce higher rate tax relief would be to reduce the annual allowance as the vast majority of those affected by this will be higher rate taxpayers . A lot simpler than fiddling around with the tax system .

2) SS is a loophole that should be closed. Not only does it reduce NI payments to the exchequer but some people also use it to claim child benefit when they are normally earning too much to do that. 

2) And university maintenance grants.

SomeMadeUpName

dunstonh said:

Salary sacrifice has gone from being a relatively insignificant cost to the Treasury to being a major one.    Mainly because of auto-enrolment.  
I believe it was looked into some years back but the problem with restricting it was differentiating what is a sacrifice and what is an employer contribution.  

That's easy to imagine.

I enter the four weekly pension contribs for one of my Ltd Co's, it's a simple table, ie:

Name                                        employer contrib                        employee contrib

A. Workerbee                                    £75                                                 £50
A. N. Other                                        £90                                                 £60

No way for L&G to know how the employer (or employee for that matter) contrib is derived.
Ergo no way to differentiate contrib from the minimum stat 8%, genuine employer 'extra' contrib, or salary sacrifice.

A problem compounded by the fact the minimum is 8% (of pensionable earning) with a minimum employer of 3%.

So even on the minimum 8% it could be (employee/employer) 5%/3% or 4%/4% or 3%/5% or 0%/8%.

Just no way they can know, they rely on the employer paying in what is right (ie stat at min) and agreed (ie contractual).

gundo

2nd_time_buyer said:

If it was me. I would:

1) abolish higher rate tax relief
2) abolish salary sacrifice on pensions
3) introduce a flat relief at 32% (i.e. the same as salary sacrifice at basic rate)

I am not sure if that is more or less affordable than the current system. If it is less, I would then be tempted to play around with the annual and lifetime allowance.

That would get rid of the two most bonkers things in the current system:
1) People who earn more (and arguably need it less) get more tax relief;
2) whether or not you can salary sacrifice pension contributions seems entirely arbitrary depending on employer.

Re Salary Sacrifice: though this would hit me quite hard as I'm contributing both to my pension and also AVCs as salary sacrifice, it does seem unfair that this isn't a universal thing. Also some employers (not mine sadly) actually pass on the NI savings to their employees.

2nd_time_buyer

"Just no way they can know, they rely on the employer paying in what is right (ie stat at min) and agreed (ie contractual)."

... which I am wondering is the thinking behind the third point in the telegraph article: taxing employer contributions

kuratowski

A lot of speculation, obviously.  I have no idea.

My hunch is that it would prove far more controversial to change the tax treatment of withdrawing money that's already within pensions today, than it would to change the tax treatment of paying money in to pensions in the future.  Which would make some of the ideas listed above more likely than others.