Pension tax relief

Albermarle

CSL0183 said:

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. 

This is most likely true.
Removing SS and reducing higher rate relief would save a lot of money, but is difficult to implement.
Others have suggested reducing the annual allowance to £30K might be simpler, although would not save huge amounts. I think would also not help with the NHS consultants/doctors pension problems.

Albermarle

Workerdrone said:

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.

Or get more of the Billions of bounceback loans repaid.

Pat38493

Albermarle said:

Workerdrone said:

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.

Or get more of the Billions of bounceback loans repaid.

I have to declare in interest here as I doubt there would be many folk affected more than me - I am planning to retire in the next 3-5 years and I am putting more than £40K into my pension this year (rollover) and hoping to do similar and max out for the next few years as well.   As such, if this change was implemented, it would cost me over £660 per month in additional tax.  I guess there is relatively few people in that situation and I doubt many would have much sympathy as they won't perhaps realised that people just starting on their career now would lose even more in the long run by this change unless they never go into higher rate tax.

That said, if I try to remove my own interests, I can see some merit to this type of approach from a policy point of view - however surely it should require a proper debate, analysis, reports on it and so on?  After all you are also removing a lot of future spending power from future pensioners which presumably would also have some kind of economic effect in future.  Also - such changes should be gradually brought in over many years and not suddenly dumped on people.

There are huge numbers of people on company payroll net deduction approach - if this was implemented quickly, they would actually see it in their net pay which is a whole different thing to trying to hide a raid on pensions behind the pension companies themselves and make it invisible to those who aren't paying attention.  Even if they moved everything to a kind of deduct at source approach, it would still have to be individually publicised to everyone as they would have to be told to change their contributions accordingly.

I have been in employment for over 30 years and on many occasions I was told by different people in HR or whatever "you do not pay tax on pension contributions".  Period.  I think there is a risk that this could be portrayed as "Convervative party for the first time ever starts taxing your pension contributions".  I think it's in a lot of people's heads that pension contributions are not taxable, and changing this might generate a lot of noise.

Finally, there are some interesting scenarios which could provide some tabloid headlines.  If you do the case study of someone who is earning say 5K above the higher rate tax amount, around £55K or so, and who is paying maybe 7 or 8 percent into their pension - if you then did a case study on the before and after situation, you would find that the tax rate on the portion of their income above the higher earnings limit that is today taxed at 40%, the tax rate on that particular portion would go up to some whoppingly high figure - Labour 90% plus taxes headlines and so on and actually it would be over 100% in that caclulation.  Even if you assume that the pension contribution is taxable income in the comparison scenario but not in the starting scenario, it's still going up to 55% on that portion of income.  Of course they will argue that this is not a valid comparison, but it's always harder to take something away than not to give it in the 1st place.  

Prism

I agree with others, very difficult to implement. Would need to prevent all direct employer tax free contributions into pensions. Not only salary sacrifice schemes but all other existing schemes. Only relief at source and personal contributions would work. Would they also need to apply changes to all DB pensions? Probably to be fair.

I can't see it happening soon

nigelbb

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.

This can be raised by simply raising income tax rates by 5p ie 20p->25p 40p->45p 45p->50p. No need to mess about with pensions.

Albermarle

nigelbb 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.

This can be raised by simply raising income tax rates by 5p ie 20p->25p 40p->45p 45p->50p. No need to mess about with pensions.

The problem with this is that most voters will understand what + 5p on income tax means, and not be happy about it. On the other hand most pension changes will not be understood properly by the large majority, so they will be less unhappy and less likely to vote based on such changes.

kinger101

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.

I think that is too simplistic - uniformity and fairness are not necessarily the same thing.  Otherwise we'd have flat tax rates.

But there are major differences in the amount of tax relief basic rate taxpayers gets between salary sacrifice and non salary sacrifice schemes.  Lifetime ISAs being available to some and not others is another spanner in the works.

Broadly - I think 6.25% benefit is insufficient to encourage saving within an pension.
The 25% benefit under salary sacrifice available to basic rate taxpayers is sufficient encouragement and probably the major cost to the treasury of pension schemes as the NI saving is permanent.

There's probably a half-way house somewhere, but the government is not really looking for a way to encourage basic rate tax payers outside sal-sac to save more. It's probably too complicated to make major changes to higher rate tax payers without addressing the salary sacrifice part.   So anything they do this budget will make very little impact to the deficit.  As most, I predict a reduction in annual allowance to save face.

The Telegraph article will be put in a shoe box, a duly dusted off when the budget after next approaches.

MK62

kinger101 said:

Broadly - I think 6.25% benefit is insufficient to encourage saving within an pension.

......but what would HR taxpayers do with the money they then no longer save into a pension?

EdSwippet

MK62 said:

kinger101 said:

Broadly - I think 6.25% benefit is insufficient to encourage saving within an pension.

......but what would HR taxpayers do with the money they then no longer save into a pension?

Venture Capital Trusts (VCTs)?

kuratowski

MK62 said:

......but what would HR taxpayers do with the money they then no longer save into a pension?

Save/invest it somewhere they can access it without waiting for decades.  The 6.25% may not be sufficient inducement to make the money inaccessible for a long time.