Pension tax relief

Pat38493

This would be a pretty bold move politically for a Conservative government 2 years before a general election.

I also suspect that this could not be done quickly as it would require significant changes in IT systems across the board.

I guess that reducing the 40K pension contributions limit per year would be quicker to implement as it's just a number that can be set lower.  

Neither policy would be at all popular among a lot of core Conservative voters, although I guess they could take the view that Labour would not dare to put in their manifesto that they would reverse it back again.

Also there seems to be a lot of talk on this thread of "tax relief" being reduced.

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Audaxer

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Pat38493

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

Dazed_and_C0nfused

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme. This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension

Pretty much everyone who is a basic rate payer and contributes using the relief at source method still pays the same amount of tax as they would without making the pension payments.  But they get basic rate tax relief added or their pension fund.

Nothing new in that.

Pat38493

Dazed_and_C0nfused said:

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme. This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension

Pretty much everyone who is a basic rate payer and contributes using the relief at source method still pays the same amount of tax as they would without making the pension payments.  But they get basic rate tax relief added or their pension fund.

Nothing new in that.

Right but whatever method is used, the practical effect of the current system is that nobody pays any income tax on money earned that they put into a pension scheme. (unless they exceed various thresholds but leaving that aside....)

It's obviously much more obvious when you are on payroll and the pension is sent to your scheme as the gross amount, but the effect is the same either way.

I always assumed that this is exactly what is intended by the entire system - you don't have to pay any income tax on money you put into a pension scheme because you will pay tax when you take it out later.

Albermarle

Pat38493 said:

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

You are forgetting the 25% tax free.
So a 20% taxpayer in employment, and when taking the pension will see a 6.25% tax benefit ( the effective rate of taxation when taking the pension is only 15% due to the 25% tax free)
So a 40% taxpayer who is a 20% taxpayer in retirement currently sees a tax benefit way above that. ( this costs the Treasury a lot of Billions) 
If the 40% tax relief was removed they would just get the 6.25% tax benefit.
If the 40% tax relief was removed and they were ( unusually ) a 40% taxpayer in retirement, then they would be losing out by paying into a pension.

Pat38493

Albermarle said:

Pat38493 said:

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

You are forgetting the 25% tax free.
So a 20% taxpayer in employment, and when taking the pension will see a 6.25% tax benefit ( the effective rate of taxation when taking the pension is only 15% due to the 25% tax free)
So a 40% taxpayer who is a 20% taxpayer in retirement currently sees a tax benefit way above that. ( this costs the Treasury a lot of Billions) 
If the 40% tax relief was removed they would just get the 6.25% tax benefit.
If the 40% tax relief was removed and they were ( unusually ) a 40% taxpayer in retirement, then they would be losing out by paying into a pension.

Somehow I doubt that his how all the people earning over £50K who will see a big tax hike on the pension contributions will see it.  I didn't really see the 25% tax free as part of the same process.  Plus as you rightly point out, this means that anyone who might be a 40% taxpayer in retirement will be worse off by paying money into a pension fund (although granted that is probably quite a small % of people.

Also the other down side to this is it all falls onto people who are still working and contributing - anyone who has already built up a huge pension fund will be unaffected.

Also as I said above, this doesn't feel like something that could be implemented instantly as I don't think a lot of payroll systems would be able to deal with such a thing without IT changes.

Audaxer

Albermarle said:

Pat38493 said:

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

So a 40% taxpayer who is a 20% taxpayer in retirement currently sees a tax benefit way above that. ( this costs the Treasury a lot of Billions) 
If the 40% tax relief was removed they would just get the 6.25% tax benefit.
If the 40% tax relief was removed and they were ( unusually ) a 40% taxpayer in retirement, then they would be losing out by paying into a pension.

Yes, so removing the 40% tax relief and giving everyone 20% tax relief, would mean that nearly everyone gets the same 6.25% benefit. That to me would seem a fairer system that as you say, would save the Treasury billions.

The only losers with that system would appear to those who remain higher rate-tax payers in retirement. I agree that does seem unfair that they should have to pay higher-rate tax in retirement if they only get 20% tax relief on the way in, so something would have to be done to address that issue.

Dazed_and_C0nfused

Pat38493 said:

Albermarle said:

Pat38493 said:

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

You are forgetting the 25% tax free.
So a 20% taxpayer in employment, and when taking the pension will see a 6.25% tax benefit ( the effective rate of taxation when taking the pension is only 15% due to the 25% tax free)
So a 40% taxpayer who is a 20% taxpayer in retirement currently sees a tax benefit way above that. ( this costs the Treasury a lot of Billions) 
If the 40% tax relief was removed they would just get the 6.25% tax benefit.
If the 40% tax relief was removed and they were ( unusually ) a 40% taxpayer in retirement, then they would be losing out by paying into a pension.

Somehow I doubt that his how all the people earning over £50K who will see a big tax hike on the pension contributions will see it.  I didn't really see the 25% tax free as part of the same process.  Plus as you rightly point out, this means that anyone who might be a 40% taxpayer in retirement will be worse off by paying money into a pension fund (although granted that is probably quite a small % of people.

Also the other down side to this is it all falls onto people who are still working and contributing - anyone who has already built up a huge pension fund will be unaffected.

Also as I said above, this doesn't feel like something that could be implemented instantly as I don't think a lot of payroll systems would be able to deal with such a thing without IT changes.

I think part of the problem is no one has come up with a workable solution to how net pay contributions would for into a flat rate system.

Net pay into a DC scheme could be overcome by amending the scheme to relief at source but for DB contributions there is no pot that the contributions go into so less simple.

One option might be too treat net pay DB contributions like relief at source but the tax relief gets added to the employees take home pay instead of it being added to the pension pot.

Whatever the end result I suspect any change is unlikely to happen before months have passed from any change being announced by the Chancellor.

Pat38493

Audaxer said:

Albermarle said:

Pat38493 said:

Audaxer said:

Pat38493 said:

Am I wrong to have seen it always in a simpler way? I should pay income tax on the money I earn once - either when I earn it, or when I spend it.  I should not have to pay income tax twice on the same money when I earn it and then when I draw it out of my pension.

Maybe I've misunderstood, but if you mean it would be simpler if you didn't get any tax relief at all when you put money into a pension, and then didn't get taxed in drawdown, is that not just the same as putting your earnings in an S&S ISA rather than a pension? 

Maybe it's me that's misunderstood the OP, but I understood that the proposal is that higher rate taxpayers would only get 20% tax relief on their earnings that they put into a pension scheme.  This would effectively mean they would still be paying 20% of income tax on income that they pay into a pension.

Then, when they draw down the pension, it would be taxed as normal income so potentially they could pay another 20% or even 40% more income tax on what was effectively the same money (forgetting the growth part for a second).

It seemed to me that a fundamental principle behind the current system is that you can pay money into your pension scheme without paying any income tax on it, but the quid pro quo is that it's subject to income tax on the way out again.  

What I understood the OP to be reporting, would result in a portion of my income being subjected to income tax twice - once now and once later.

If as you say we got no tax relief at all on putting money into the pension, they would have to change the tax rules for taking it out otherwise the whole point of pension savings would be negated?

So a 40% taxpayer who is a 20% taxpayer in retirement currently sees a tax benefit way above that. ( this costs the Treasury a lot of Billions) 
If the 40% tax relief was removed they would just get the 6.25% tax benefit.
If the 40% tax relief was removed and they were ( unusually ) a 40% taxpayer in retirement, then they would be losing out by paying into a pension.

Yes, so removing the 40% tax relief and giving everyone 20% tax relief, would mean that nearly everyone gets the same 6.25% benefit. That to me would seem a fairer system that as you say, would save the Treasury billions.

The only losers with that system would appear to those who remain higher rate-tax payers in retirement. I agree that does seem unfair that they should have to pay higher-rate tax in retirement if they only get 20% tax relief on the way in, so something would have to be done to address that issue.

That depends how you define losers.  If you are someone who is currently a higher rate taxpayer, a few years away from retirement and aggressively funding your pension scheme, and you end up having to delay your retirement due to many thousands of extra tax per year being suddenly taken from your contributions compared to what was always previously the case, you might define yourself as a loser from that policy change.