October Budget - Pension Tax Relief vs Salary Sacrifice

id311299

[Deleted User] said:

id311299 said:

If the above is correct, I see a couple of problems:

• For someone who is only paying basic rate tax, for every £1 they pay into their pension, additional £0.18 must come from somewhere? Where is this top-up coming from, and when?

The whole 43p comes from the government.  Yes, it's is more that the tax paid on £1.43 at the basic rate.  But so what.  That's no different to what happens with a non-taxpayer who puts money into a pension. They still get basic rate tax relief

With Salary Sacrifice tax on contributions never reaches Treasury - my understanding is that it goes straight to the workplace pension provider? The "cost" that Treasury pays is not collecting the tax on that amount. In a flat 30% world, Treasury will have to top up each transaction with money it already has?

id311299 said:

• Even if current calculations show that the Treasury will be better off, that may not be the case when people, especially those earning a little above £50k, adjust their contributions to benefit as much as possible from the said top-up. Effectively there will be yet another group of people with big incentive to shovel more money into their pension - the "little above £50k" group, and this time the Treasury isn't just not collecting tax from them, it is paying already collected tax back to that group.

Please help me wrap my head around this if I misunderstand something.

No.  You would get tax relief at 30% whatever your marginal rate.  So whether or not you earn more than £50,000 has no impact on the cost of any new tax relief.  One extra cost though would be non taxpayer / basic rate taxpayers making higher pension contributions than they would otherwise have done.

Then there are second order effects.  If, for example, someone paid extra pension contributions to get, for example, no clawback of child benefit, personal allowance, get 40% relief, etc then they may choose not do because they will only benefit by 30%.  Others who expect to be higher rate taxpayers in retirement may decide to put less in because they don't want to get 30% relief now in the expectation of paying 40% tax later. Another is that if 45% taxpayers make less pension contributions then they may spend more on things that they pay VAT on, so raising more VAT and corporation tax (from the person who sells them). 

I am trying to look at it in comparison between today and a flat 30% world, i.e. what will Treasury gain in a like-for-like scenario for a person earning the same amount.

If I earn £50k gross PA and pay DC through SS of £1250 a month:

- currently £1,250x12 = 15,000 ends up in my pot for that year, Treasury never earns tax revenue on that £15k

- in a flat 30% world, I end up with £1,430x12 = £17,160 in my pot. Treasury not only didn't earn tax revenue on that £15k, but also topped it up with additional £2,160

Allegedly that additional £2,160 came from someone who paid their tax charge on a contribution from their higher rate band. In the new world, compared to the current one, the balance only works in favour of the Treasury if penalizing higher earners generates additional revenue that fully offsets the required subsidizing of basic rate earners (and non-earners). I find this to be a direct first-order effect.

Pat38493

Where did this 30% number that keeps getting thrown about come from?

Is it like the 10k steps per day thing that everyone still targets, but it turns out it was made up on the spot by someone trying to sell trainers in Japan?

I also find it not that plausible that having flat rate 30% relief would generate a lot more revenue -  not to mention, 30% is a suspiciously round number. 

westv

Pat38493 said:

Where did this 30% number that keeps getting thrown about come from?

Is it like the 10k steps per day thing that everyone still targets, but it turns out it was made up on the spot by someone trying to sell trainers in Japan?

I also find it not that plausible that having flat rate 30% relief would generate a lot more revenue -  not to mention, 30% is a suspiciously round number. 

It's a made up number which is simply the mid point between 30% and 40%

Grumpy_chap

Pat38493 said:

Where did this 30% number that keeps getting thrown about come from?

Does it reflect basic rate income tax plus some element of NI that would be paid - but is avoided under SS?

Pat38493

[Deleted User] said:

Pat38493 said:

Where did this 30% number that keeps getting thrown about come from?

It's a number that is (i) round, (ii) makes things broadly cost neutral without taking into account behavioural effects, and (iii) is more cost neutral for a higher-rate taxpayer (30% relief offsets being taxed at 40% on 75% of the pot).

So if you take the statistics that (i) basic rate relief costs 33% of the income tax relief, (ii) higher rate 58% and (iii) additional rate 9% then by moving from relief at marginal rate to a fixed 30% rate then the cost of income tax relief is roughly 99% of what it was before.  Obviously there are behavioural effects (e.g. basic rate taxpayers may be more keen to save, other taxpayers less keen).  With more people being dragged into higher rate tax, that 99% will reduce over time.

Using 25% gives rougly 82% of the current cost of income tax relief - so roughly £8bn a year before behavioural effects.  

How reliable are those stats?   Maybe my back of a napkin maths is bad, but isn’t everyone who earns less than about 90K going to end up better off.  That’s got to be tha vast majority.   Also the 30% number doesn’t actually save any money for the government even if it’s correct.

if they go for that it’s got to be capping it at 20% for everyone otherwise it’s not really going to generate that much?

Nebulous2

25% has also been widely bandied about. I've seen 23% mentioned in passing. 

There's a fabian society report quoted in the Guardian claiming that total tax relief on pensions costs £66bn a year, with upper and top rate taxpayers getting 53% of that. They estimate £10bn a year savings possible from a range of measures. 

Thisismoney says £48.7bn of tax relief, with 2/3rds going to upper and top rate taxpayers. 

zagfles

id311299 said:

[Deleted User] said:

id311299 said:

If the above is correct, I see a couple of problems:

• For someone who is only paying basic rate tax, for every £1 they pay into their pension, additional £0.18 must come from somewhere? Where is this top-up coming from, and when?

The whole 43p comes from the government.  Yes, it's is more that the tax paid on £1.43 at the basic rate.  But so what.  That's no different to what happens with a non-taxpayer who puts money into a pension. They still get basic rate tax relief

With Salary Sacrifice tax on contributions never reaches Treasury - my understanding is that it goes straight to the workplace pension provider? The "cost" that Treasury pays is not collecting the tax on that amount. In a flat 30% world, Treasury will have to top up each transaction with money it already has?

id311299 said:

• Even if current calculations show that the Treasury will be better off, that may not be the case when people, especially those earning a little above £50k, adjust their contributions to benefit as much as possible from the said top-up. Effectively there will be yet another group of people with big incentive to shovel more money into their pension - the "little above £50k" group, and this time the Treasury isn't just not collecting tax from them, it is paying already collected tax back to that group.

Please help me wrap my head around this if I misunderstand something.

No.  You would get tax relief at 30% whatever your marginal rate.  So whether or not you earn more than £50,000 has no impact on the cost of any new tax relief.  One extra cost though would be non taxpayer / basic rate taxpayers making higher pension contributions than they would otherwise have done.

Then there are second order effects.  If, for example, someone paid extra pension contributions to get, for example, no clawback of child benefit, personal allowance, get 40% relief, etc then they may choose not do because they will only benefit by 30%.  Others who expect to be higher rate taxpayers in retirement may decide to put less in because they don't want to get 30% relief now in the expectation of paying 40% tax later. Another is that if 45% taxpayers make less pension contributions then they may spend more on things that they pay VAT on, so raising more VAT and corporation tax (from the person who sells them). 

I am trying to look at it in comparison between today and a flat 30% world, i.e. what will Treasury gain in a like-for-like scenario for a person earning the same amount.

If I earn £50k gross PA and pay DC through SS of £1250 a month:

- currently £1,250x12 = 15,000 ends up in my pot for that year, Treasury never earns tax revenue on that £15k

- in a flat 30% world, I end up with £1,430x12 = £17,160 in my pot. Treasury not only didn't earn tax revenue on that £15k, but also topped it up with additional £2,160

Allegedly that additional £2,160 came from someone who paid their tax charge on a contribution from their higher rate band. In the new world, compared to the current one, the balance only works in favour of the Treasury if penalizing higher earners generates additional revenue that fully offsets the required subsidizing of basic rate earners (and non-earners). I find this to be a direct first-order effect.

You don't seem to understand. If you sal sac, you exchange pay for employer pension conts. You save not just tax but NI. The effective marginal relief for a basic rate taxpayer is 28%. 

The 30% or whatever proposed flat rate would apply to personal/employee conts not employer conts. How employer conts are handled has been discussed earlier. Sal sac could be stopped, or limited. But if retained, it's not likely to change at all. 

If sal sac is stopped, then instead of you sal sac'ing £15,000 into your pension, you pay in £10,500 from after tax income and the treasury tops it up £4,500 for the same £15,000 into your pension. But you get charged £3000 extra tax and £1200 NI on that £15000. So your net gain is £300, ie 2% of your contribution. 

But a higher rate taxpayer would pay 42% extra tax/NI and only get 30% relief, costing them 12%. ie £1800 of that £15,000. 

In addition, employer NI conts would be payable on the salary no longer sacrificed, at 13.8%. So the treasury would gain over 10% from basic rate taxpayers and over 25% from higher rate taxpayers. Comparing sal sac to flat rate at 30% is blatently obviously a big win for the treasury. 

They'd lose a 10% for non sal sac pension conts for basic rate taxpayers, and gain 10% for higher rate. 

Pat38493

[Deleted User] said:

Pat38493 said:

Maybe my back of a napkin maths is bad, but isn’t everyone who earns less than about 90K going to end up better off.  That’s got to be tha vast majority.   

You need a new napkin.  It's all about marginal rate rather than average rate.  So if someone makes £1,000 of gross pension contributions and the rate is 30% then they they will be indifferent to the change if they earn £500 above the basic rate / higher rate threshold.

Oops - this is what happens when you make vague logical leaps late at night whilst doing 3 other things.

leosayer

Nebulous2 said:

25% has also been widely bandied about. I've seen 23% mentioned in passing. 

There's a fabian society report quoted in the Guardian claiming that total tax relief on pensions costs £66bn a year, with upper and top rate taxpayers getting 53% of that. They estimate £10bn a year savings possible from a range of measures. 

Thisismoney says £48.7bn of tax relief, with 2/3rds going to upper and top rate taxpayers. 

25% is the "government bonus" on LISAs, which equates to basic rate (20%) income tax relief.

crv1963

This thread has been an interesting read. IMHO I don't think that they will target SS as they want to encourage pensions saving not penalise it. The NHS Pension scheme is one where you pay NI on your earnings then the individuals pension contribution is deducted before tax is paid. So it would be relatively simple to implement NI rise by cutting that aspect from SS? Removing the right to sacrifice before NI is taken isn't technically increasing NI rates is it?