New Pension(er) Tax Allowance

af1963

"The allowance will apply from 6 April 2027 until 5 April 2030..."

Governments have found that things like this are difficult to abolish once they are set up.

It's why we still have a £10 pensioners Xmas bonus and a 25p pension increase at age 80.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82184570#Comment_82184570

I confess to wondering why there is a taper at all. Surely it just benefits people getting more than the new Sate Pension. They were never included in the original promise (then again neither was other income apart from the state pension).

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82184566#Comment_82184566

Good point - I'd forgotten they'd been at it beforehand. I'd agree freezing it is politically painless, but I think they'll also reduce it further. Maybe I should revise 10 years to 5 given the previous frequencies?

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/82184340#Comment_82184340

As Pension Tax Allowance is a new tax reducer why would it impact the Personal Allowance 🤔

SnowMan

This is how the numbers work out for investing in a pension. By comparing a SIPP with an ISA we are essentially calculating the net value of the tax relief going in less the tax coming out and ignoring tax free returns as they cancel. The green shaded boxes represents the scenarios where the net tax relief in less tax out are beneficial to the SIPP holder, and the red where they are detrimental

The 20% tax relief in and 53.333% tax going out figure is calculated as (1/0.8 x 0.25) + (1/0.8 x 0.75 x (1 - 0.5333)) - 1 = minus 25%. Not a good outcome!

The 53.333% represents the effective marginal rate between £13,037 and £13,319 in 2027/2028. Initially the slice taxed at 53.333% is quite small but that gets increasingly larger over the course of the parliament.

It is this sort of policy that undermines confidence in the tax system completely. We should have a progressive tax system where the tax rate increases as an individual's income rises (it certainly shouldn't fall at any point). And your beliefs and politics determine the level of that progressive nature.

In reality under the UK tax system that doesn't always happen and now we have yet another anomaly where those on a lower income (in this case £13,037 to £13,319) get taxed at a much higher rate than those on many higher incomes.

mrklaw

is this just a sticking plaster because HMRC have no meaningful way to tax state pension as normal income and they don’t want to start sending out ten million simple assessment letters?

surely there was a simpler way to do this? eg just pay the state pension net and issue a 0 tax code to everyone? something like that

I don’t understand why the specific need to say we won’t tax you if you have just the pension. either the 12570 allowance is justified or its not - why are pensioners special?

QrizB

why are pensioners special?

They vote in large numbers.

Silvertabby

Whoever dreamt up this taper idea needs a good talking to. It will be a nightmare to administer, and will cause more upset than it's worth.

Presumably introduced in order to give a bit more to those who are only a little over the original limit of £13,036 - but it would have been far simpler to have used, say, £13,300 as the tax exemption cut off.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82184586#Comment_82184586

Because otherwise you'd get headlines like "my £1 of interest cost me £94 in tax".

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82184589#Comment_82184589

But previous LTA reductions came with various protections for those with pensions already above it. Reducing the LSA with similar protections would not raise much in the short term and discourage pension saving in the long term.

They'll probably just let fiscal drag do the work, look how well it's working with income tax. As I worked out in another thread, for someone with an index linked pension (or earnings) at the higher rate threshold in 2021, fiscal drag till 2031 is equivalent to raising basic rate tax to 37% !!