Telegraph reporting - pensions tax threat

2nd_time_buyer

I think SS is "tolerated" because it partly bridges the gap between basic and higher rate tax relief, so that the total effective relief is 32% and 42% respectively i.e. a difference of 10% compared to 20% normally.

I am not sure this is less fair than the difference between basic and higher rate relief (other than SS is not available universally). Or that people on low incomes often have little disposable income and therfore the level of tax relief is a moot point because they barely utilise it.

Andy_L

michaels said:

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. 

Umm - I have paid about 25 years of NI and have the max state pension entitlement - sal sac means I can avoid some of the NI that I still have to pay despite not receiving any more pension, unlike most other people who earn pension entitlement from their NI payments.  How is me having to pay NI for nothing fair?

NI doesn't just pay for the state pension so you're not paying it for nothing

Albermarle

nigelbb said:

Allowing salary sacrifice has always been disgraceful as it evades both income tax & National Insurance.

How does SS for pension contributions .evade tax ? You get the same tax relief in the end , however pension contributions are made .

The key issue is the non payment of NI by employee and employer, and even in some cases using the effectively reduced salary  to claim child benefit and Uni maintenance grants, that otherwise they would not be entitled to. 

zagfles

kidmugsy said:

If a bit of fiddle-faddle is planned I'd like to see changes in the direction of simplification.  (Roars of ironic laughter.)

Abolish lifetime allowance altogether.  Or abolish annual allowance altogether.  But please get rid of the complexity of LTA + protected LTA + AA + Tapered AA + MPAA + carry-forward AA.

Example: no LTA and therefore no protected LTA; AA = £20k, no tapering, no MPAA, no carry-forward AA.  With the AA now rather modest, scrap the anti-recycling rules too.  (Oh yeah, and how about decoupling AA from earnings?  Anyone can bung in £20k p.a. even if it comes from an inheritance from Aunt Maisie?)

Hm, it begins to sound like the ISA rules except for the tax relief.  OK, scrap new ISAs too.

Since about the only thing that Joe Bloggs understands about pensions is the 25% TFLS, leave it be.

The AA is already "decoupled" from earnings, except for very high earners affected by the taper. If you mean the tax relief limit, then if recycling rules also abolished, everyone over 55 could simply use a simple tax dodge of paying £20k a year into a pension and taking it straight out again, generating an extra £5k tax free cash allowance. You need to think about it a bit more!

zagfles

nigelbb said:

Eldi_Dos said:

The way the triple lock is working is not levelling up pensions but increasing the gap between those on lower pensions and those on higher pensions.

The triple lock is intended to gradually increase the real value of the state pension over the years as it is the lowest in Europe as a proportion of average earnings.

The state pension & the triple lock is the same for all. There is no lower state pension & higher state pension.

It isn't. It's designed to avoid "peanuts" headlines in the Sun.

zagfles

nigelbb said:

Allowing salary sacrifice has always been disgraceful as it evades both income tax & National Insurance.

So public sector pension schemes are equally disgraceful then, as the employer contribution value is often around 30-40% of salary, which is not subject to tax or NI. That's equally disgraceful as someone sacrificing 30-40% of their salary into a private sector DC pension, ie creating a similar level of tax & NI free employer conts as a typical public sector DB pension. Right? 

Eldi_Dos

nigelbb said:

Eldi_Dos said:

The way the triple lock is working is not levelling up pensions but increasing the gap between those on lower pensions and those on higher pensions.

The triple lock is intended to gradually increase the real value of the state pension over the years as it is the lowest in Europe as a proportion of average earnings.

The state pension & the triple lock is the same for all. There is no lower state pension & higher state pension.

The intention of the triple lock is laudable but in reality it is widening the gap between pensioners on a lower amount of state pension and ones on a higher amount of state pension. When pensioners receive their increase letters in March and compare they do not compare percentages but how much of an actual increase per week they have received and from conversations with our social group it seems women are coming worse off from the way the triple lock is being implemented.

kidmugsy

nigelbb said:  The state pension & the triple lock is the same for all. 

Oh no it isn't.  If you have a new-style State Pension you get the triple lock on all your pension.  If you have the old-style, you don't. Only the basic part gets the triple lock; your additional pension gets CPI.

kidmugsy

zagfles said: The AA is already "decoupled" from earnings, except for very high earners affected by the taper.

Not so: carry forward ties together your AA and your earnings, in the sense, for example, that somebody on less than £40k p.a. income can't exploit carry forward.
To simplify it is necessary to simplify. Funking it will just leave complications in place or introduce new ones.

If you mean the tax relief limit, then if recycling rules also abolished, everyone over 55 could simply use a simple tax dodge of paying £20k a year into a pension and taking it straight out again, generating an extra £5k tax free cash allowance. You need to think about it a bit more!

On the contrary, that's part of the plan.  Let them do it.  One reason that things get so complicated is that puritan obsessives (e.g. Gordon Brown) insist on imposing complexity in fear that otherwise people might enjoy themselves.

Rebuttal in italics.

MX5huggy

% pay rises always increase the absolute gap between lower and higher paid individuals. If you opted for say £5 for everyone then the value of the higher contributions would be reduced. There’s no perfect answer.

I think employees NI should be scrapped, it unfairly falls on low to middle earners, its smoke and mirrors. Why do we pay more tax on earned income than unearned? If you need some system to record NI credits then set NI very low 2% seems to be OK for higher rate payers. 

I use SS but it should be reformed, made available to everyone it’s an employer choice ATM and many don’t know/can’t be bothered. Then the requirement that take home pay is equal or in excess of NMW should be removed why can’t the low paid get tax savings on pension or child care vouchers?