Pension tax relief

JoeCrystal

Mick70 said:

Telegraph reporting that pension tax relief for middle earners (and higher) may well get cut back to basic 20%,

Good... 

I will wait until the actual speech and, more importantly, the documents and, EVEN more critical, the background documents, small prints, and footnotes in these documents.

HappyHarry

This comes up before every budget. As yet, no government has ever decided to cut the tax relief.

it would cause problems for those in DB pensions and those using salary sacrifice. 

There is also the key issue that people may stop saving into pensions if they are only gaining 20% tax relief on contributions, but face a potential 40%/45% tax on withdrawals.

NedS

Albermarle said:

Mick70 said:

Telegraph reporting that pension tax relief for middle earners (and higher) may well get cut back to basic 20%, kick in the teeth for some on here I guess 

does a salary sacrifice scheme get round this and high earners still get full tax relief using that ?  

The article says that pension tax relief costs £42.7 Billion pa , of which £22.9 billion is related to income tax and £19.8 billion related to NI. Presume the latter is due to salary sacrifice, but this is not mentioned anywhere in the article, and it seems very high. ( nearly as much as tax relief) so I suspect the figures are not accurate/badly reported
Apparently a reduction in 40% tax relief to 20% would save about £10 billion.

Of course this story surfaces on a regular basis, but might have more legs in the current situation? Although as already mentioned it is not simple to implement, and I would suspect if anything is announced on  Nov 17th, it will be light on detail and for implementation at some later date.

I too was shocked to see that the NI component was almost as high as that for tax relief. I've thought for a long thought they need to address that, as I do not believe it is right or fair to benefit from reduced or nil NI as a result of pension contributions through salary sacrifice. I guess the solution would be to make salary sacrifice illegal for pension purposes, and all pension contributions must be made in the normal way, either by net pay or relief at source arrangements - at which point it should be easier to introduce a flat rate of relief at 20% or whatever.

How they address DB schemes is a separate issue - maybe increase the employee's salaries over time and ask them to pay higher contributions to offset the rise, to make the tax/NI situation more equivalent to those on DC schemes and are not 'benefiting' from paying less NI or 40% tax on a lower salary.

If they can raise an instant £20bn from eliminating NI avoidance by stopping salary sacrifice, and another £10bn from removing 40% tax relief, then that goes a long way to plugging the £50bn gap right there and certainly places the burden on those most able to afford it in a fair way (really, why should some people get to pay less or no NI?). No previous government has had the b@lls to touch pension tax relief - maybe the current situation will give the current government enough incentive. What's the alternative - axe the triple lock and give pensioners less, axe inflation rises for those most vulnerable (pensioners and those on benefits), means-test state pension or disability benefits, cut the NHS budget even further and further increase waiting times, slash defence and educations budgets, slash local authority budgets and local services even further? None of which get close to raising £30bn that changes to the pension tax system could.

I very much doubt any change could be implemented immediately - at the earliest it would be next April.

Simon11

NedS said:

If they can raise an instant £20bn from eliminating NI avoidance by stopping salary sacrifice, and another £10bn from removing 40% tax relief, then that goes a long way to plugging the £50bn gap right there and certainly places the burden on those most able to afford it in a fair way (really, why should some people get to pay less or no NI?). No previous government has had the b@lls to touch pension tax relief - maybe the current situation will give the current government enough incentive. What's the alternative - axe the triple lock and give pensioners less, axe inflation rises for those most vulnerable (pensioners and those on benefits), means-test state pension or disability benefits, cut the NHS budget even further and further increase waiting times, slash defence and educations budgets, slash local authority budgets and local services even further? None of which get close to raising £30bn that changes to the pension tax system could.

I very much doubt any change could be implemented immediately - at the earliest it would be next April.

As a country, we should be encouraging people to put as much into pensions. I certainly will reduce my pension contributions if this happens.

If people put less into their pensions, then there will be bigger costs for the government in the future to cover social care for when peoples pensions runs out.

Hopefully common sense is used if this happens and there is still a decent amount you can invest into a pension tax free- e.g. £20k p.a.

Audaxer

HappyHarry said:

There is also the key issue that people may stop saving into pensions if they are only gaining 20% tax relief on contributions, but face a potential 40%/45% tax on withdrawals.

That could be an issue, but I was thinking that many people in the higher tax band currently getting 40% tax relief, would probably only be drawing down enough to pay 20% tax when they do start drawing down their DC pensions?

Altior

Why would cutting the NHS budget further increase waiting times?

If it's anything like the private sector business I work for, you could easily slash 10% of the head count and nobody would notice. Dozens and dozens of completely peripheral positions that have absolutely zero impact on operations. Actually, I tell a lie, they disrupt operations and they pull people away from those tasks to justify their own existence.  

HappyHarry

Audaxer said:

HappyHarry said:

There is also the key issue that people may stop saving into pensions if they are only gaining 20% tax relief on contributions, but face a potential 40%/45% tax on withdrawals.

That could be an issue, but I was thinking that many people in the higher tax band currently getting 40% tax relief, would probably only be drawing down enough to pay 20% tax when they do start drawing down their DC pensions?

Many will quite possibly do just that.
But with the state pension likely to rise, and if tax thresholds are frozen, more and more people will be finding themselves higher rate taxpayers in retirement. 

I see the concept of reducing tax relief as more of a left wing ideology rather than one expected from a right wing conservative government.

NedS

Simon11 said:

NedS said:

If they can raise an instant £20bn from eliminating NI avoidance by stopping salary sacrifice, and another £10bn from removing 40% tax relief, then that goes a long way to plugging the £50bn gap right there and certainly places the burden on those most able to afford it in a fair way (really, why should some people get to pay less or no NI?). No previous government has had the b@lls to touch pension tax relief - maybe the current situation will give the current government enough incentive. What's the alternative - axe the triple lock and give pensioners less, axe inflation rises for those most vulnerable (pensioners and those on benefits), means-test state pension or disability benefits, cut the NHS budget even further and further increase waiting times, slash defence and educations budgets, slash local authority budgets and local services even further? None of which get close to raising £30bn that changes to the pension tax system could.

I very much doubt any change could be implemented immediately - at the earliest it would be next April.

As a country, we should be encouraging people to put as much into pensions. I certainly will reduce my pension contributions if this happens.

If people put less into their pensions, then there will be bigger costs for the government in the future to cover social care for when peoples pensions runs out.

That is of course very true - but I believe the level at which the state safety net is set will be very unappealing for higher earners. Take someone earning in excess of £50k per year (say £80k) and contributing £30k into a pension to benefit from NI reduction and HR tax relief. They probably already have a large enough pension pot to ensure they are not going to be entitled to any means-tested state help upon retirement, so it's very unlikely reducing their pension contributions now will lead to a higher burden on the state when they retire.

Regarding social care, it is very unlikely they would be able to fully fund this out of pension income alone (recently received quotes of £1750/week each for my parents for a care home place). Far more likely they would need to sell their house to fund it. Would they really want to be reliant on a council funded care home should they need care in their old age?

Altior

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Mick70

Maybe get rid of the NI loophole but keep the actual tax relief ?