Pension tax relief

MK62

Any revenue changing policy change the government makes is going to have winners and losers.......and if the change is to raise revenue, there are usually a lot more losers than winners.
The bottom line is that there's a £50B hole in the nation's finances.....and it has to be plugged somehow.

theblueflash

Pat38493 said:

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.

What he ⬆️ said - this is me. 

ex-pat_scot

theblueflash said:

Pat38493 said:

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.

What he ⬆️ said - this is me. 

And me...

Cus

I am an additional rate tax payer.  I don't see why I should be able to defer 45% tax of my wage for the promise that when I retire I will likely only pay 20% on that money. Encourage me to save? I have enough. Why not give basic rate payers a tax bonus, say 30%, on their pension contributions as a big incentive, and reduce mine accordingly. Surely a generation of basic rate tax payers preparing for pension is more logical net net?

Simes122

nigelbb said:

Simes122 said:

Mick70 said:

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

Is the NI a loophole?  NI is not payable in retirement- I’m sacrificing salary now, for when I’m a pensioner.  When I’d have no liability for NI.

National Insurance is only levied on earnings. You will not pay NI on a pension. The bonus of not paying NI when you reach state pension age only applies if you work.

Not sure if you are agreeing with me, disagreeing with me or saying the same as me in a different way.  I know I won’t pay NI when I’m retired and not working and in receipt in my pension.  I’m saying if I defer salary now via salary sacrifice, there is no loophole.  Im not earning now so no ni is due now. It isn’t a loophole - I’m deferring salary till later, at which point no ni is due.

Simes122

EdSwippet said:

Albermarle said:
...

 I will pay tax in retirement at HR thus it would be grossly unfair for relief to be less than my expected tax.

Although many people pay some 40% tax in employment, the % paying 40% tax in retirement must be pretty small. This forum has many posters sitting on relatively large pension pots/assets/DB schemes etc, but paying 40% tax after retiring is rarely mentioned.
So I guess you will be one of the 'broad shoulders' they talk about !

Please attribute the above correctly. I didn't write it.

It was me who wrote it.  I have a DB 1 of 36k and DB 2 of 4,2k.  Cpi uplift is 10.1% applied in Apr to DB1 and 7.5% to DB2.  I’m in Scotland so that puts me on HR tax at >£43.6k.  Anything in my SIPP is now liable for 41% tax, which is fine, as I have had 41% relief going in.  Not really super rich for a couple I’d say, and if I’m only getting relieved at 20%, then paying 41% coming out, I’d  say that would be a raw deal and would stop working.  So limiting relief is very unfair in this circumstance.

CSL0183

Extremely complex and unlikely to happen. 

In order to remove salary sacrifice schemes the government would have to adopt a BIK tax on the full employers contribution. Roll this over into the public sector DB schemes where contribution rates are around 30% for employee/employer then this would hit everyone very hard. Taxpayer inclusive. 

Further, basic rate taxpayers currently receive 32% relief (33% in Scotland) a flat rate under that would penalise millions of pension savers.

Instant vote loser and there would be a backbench revolt which would paralyse government also. 

The whole thing disincentivise pension saving when in effect you will be taxed on the same pot of money twice if higher rate. 

Not happening in a month of Sundays and certainly not before talking to trade unions etc. NHS staff are soon to strike over pay, this further raid would paralyse it. 

CSL0183

MK62 said:

Any revenue changing policy change the government makes is going to have winners and losers.......and if the change is to raise revenue, there are usually a lot more losers than winners.
The bottom line is that there's a £50B hole in the nation's finances.....and it has to be plugged somehow.

Isn’t it strange that Liz Truss’s £50bn giveaway was scrapped but yet we are left with the £50bn bill to plug? 

I find it bizarre that this hasn’t been challenged. We are being taken for fools unless this is Furlough pay back under disguise. 

MK62

CSL0183 said:

MK62 said:

Any revenue changing policy change the government makes is going to have winners and losers.......and if the change is to raise revenue, there are usually a lot more losers than winners.
The bottom line is that there's a £50B hole in the nation's finances.....and it has to be plugged somehow.

Isn’t it strange that Liz Truss’s £50bn giveaway was scrapped but yet we are left with the £50bn bill to plug? 

I find it bizarre that this hasn’t been challenged. We are being taken for fools unless this is Furlough pay back under disguise. 

The numbers are estimates and change by the month, but basically the cost of the Truss/Kwarteng mini-budget was on top of the fiscal hole which was already there.........the idea was to stimulate growth sufficient to cover both in time........the markets didn't agree with the growth assumptions, and well you know the rest. The mini-budget measures have been mostly reversed now (apart from the NI change for now at least), but that still leaves the original hole.

The energy price guarantee (originally 2yrs, but since scaled back to 6 months) is another cost which is going to have to be accounted for - though the exact cost is very hard to predict with any degree of certainty.....as is it's replacement (as yet unknown).

The number currently being bandied about for the size of this fiscal "hole" is c£50bn, but we'll have to wait for the chancellor's statement on Nov 17th for further details......a lot of it, and what he will do about it, is all speculation atm.

Workerdrone

CSL0183 said:

MK62 said:

Any revenue changing policy change the government makes is going to have winners and losers.......and if the change is to raise revenue, there are usually a lot more losers than winners.
The bottom line is that there's a £50B hole in the nation's finances.....and it has to be plugged somehow.

Isn’t it strange that Liz Truss’s £50bn giveaway was scrapped but yet we are left with the £50bn bill to plug? 

I find it bizarre that this hasn’t been challenged. We are being taken for fools unless this is Furlough pay back under disguise. 

Then hit everyone who was on furlough with a higher tax code for the next few years to pay it back... Nope, don't see that being very popular either.