Avoiding 40% Tax

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82179611#Comment_82179611

You've been whooshed. The PP said that was the excuse to increase saving tax (which applies to pensioners too), and it could be done for pensions too with the same excuse.

prowla

https://forums.moneysavingexpert.com/discussion/comment/82179626#Comment_82179626

I think I said that pension-age Pension contributions don't get NI relief because they're not paying NI anyway.

Is that a double-whoosh?

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82179861#Comment_82179861

Maybe triple. They didn't get NI relief (except on employer conts) whatever age, so it's no excuse to tax pensions at a higher rate than earnings.

etienneg

It's often stated that with pensions you get tax relief "on the way in" and then pay tax "on the way out" (admittedly with 25% of the withdrawals tax-free). This is particularly good, of course, if you are a higher rate tax payer whilst working and only standard rate when retired, which is a good incentive to save for retirement.

However, in the current climate (inflation and frozen tax thresholds) it's quite possible to find yourself having been a standard rate tax payer whilst working and higher rate when retired! But by that time it's too late to change your mind. As I said above, I accept that the 25% tax free is still valuable, but surely saving tax at standard rate only to have to pay it later at higher rate is a disincentive to pension saving. Is this what the government intends?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82179879#Comment_82179879

This has been discussed on the forum before. The general feeling was that the number of retired people paying 40% tax was relatively low ( for one thing it is generally easier to avoid it than when you are working, by partly using money from savings, ISAs etc) . So you can assume that the number of people paying 20% tax in employment and 40% in retirement, will be significantly lower still. Of course you are right though that this small cohort will be slowly growing due to inflation and frozen allowances.

Govt policy will always affect different people differently. The current tax regime still incentivises pension saving for the large majority.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/82179190#Comment_82179190

Of course, nobody disputes that fiscal drag brings more pensioners into higher rate tax - according to Pensions Age the number has more than doubled from just under 494,000 in 2021/22 to over one million (1,092,000) in 2026/27.

However, that needs to be put into the context of the 13 million pensioners, so even if the higher rate cohort doubles again to 16.4%, or triples to 25.2%, in the foreseeable future, it'll still be way short of 'most', although no doubt there are also some close to the higher rate threshold (but below it) who could legitimately be described as worrying about it!

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82180198#Comment_82180198

The equation is changing fast. 5 years ago the HRT threshold was about twice average earnings, by the end of the freeze in 2031 it'll likely be pretty close to average earnings.

But as people don't tend to be up in arms about fiscal drag because they don't understand inflation, the govt can get away with raising the tax take in this way, so why wouldn't they continue. Our kids will probably be complaining they only got 40% tax relief and are having to pay 60% tax on their pensions.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82179869#Comment_82179869

I have noticed there is a tendency on these boards to regard what you put into a pension as the same as what you get out. But of course apart from employer contributions (if any) the amount you get out of the pension will include quite a lot of investment return and you won't have paid any NICs on that.

And maybe they won't try to come up with an excuse maybe they will just say we are taking 2% off NICs and adding 2% to IT. So no working people are worse off.

Anyway all this is just because I was speculating that pensions could be subjected to a tax increase which means suffering 40% tax now might be better than 42% tax later. I could be completely wrong and someone could decide to exempt pension income of any kind (not just the state pension) from income tax and then you'd be regretting taking anything out now even at 20%! As we all know you shouldn't plan based on pure speculation.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82180254#Comment_82180254

They've promised not to raise income tax rates. Why would they break a promise and cause negative headlines when they can just carry on using fiscal drag which raises far more and which most are too stupid to understand?

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82180262#Comment_82180262

I feel I am being tempted into a "political" response so I will shut up.

You seem very confident that this is a change which couldn't possibly happen. Whenever I think that about something it usually does happen. So I will keep thinking it is a possibility (and then maybe it will never happen).