A Flat Rate of Tax Relief?

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • woolly_wombatwoolly_wombat Forumite
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    It's a long established approach - to ramp up ones' contributions in the evening of the career, when the financial pressures might start to abate, and salaries are at their max.
    In the professions, the max earning window is quite late and quite short!

    I believe the tax system in the 1970s used to positively encourage that approach. I can vaguely remember my Dad telling me that there were strict annual limits on pension contributions, based on an annual % of earnings. The % increased with age. It was explained to me because I wasn't eligible for a full student grant and he couldn't afford to top it up and pay the maximum into his pension! (I still feel very lucky in comparison to today's students).

    It's worth remembering how much can change over time in terms of pensions and tax relief.
  • ex-pat_scotex-pat_scot Forumite
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    zagfles wrote: »
    Don't forget there are loads of other ways the govt will save money if pension conts become a BIK. For instance, tax credits use taxable income (after pension conts deducted), UC works in a similar way, other benefits allow partial deductions for pension conts, assessment for student loans, child ben withdrawal, PA withdrawal etc.

    All these use taxable income as the basis, if taxable income now includes pension conts, both employee and employer, with a flat rebate at around 30%, then there will be savings even from some people on basic rate tax because of the above. Added to the saving from higher rate taxpayers, who obviously contribute more anyway, and 30% is likely to be seriously fisally positive from the govt's POV.


    Interesting angle and a general change in sentiment.


    In the previous discussions on flat rate relief (2016?), the principle of tax neutrality was central to the discussion.


    Now the mood is "tax raising, by targeting the unfair higher rate relief that the government gives disproportionately to the better-off".


    As an employee, there are very few ways of managing your tax, apart from
    - pensions contributions
    - charitable gifting
    - childcare vouchers
    - bike scheme.


    Of these, only pensions can make a significant effect on the "unfair" marginal tax bands/ rates.


    Benefits, credits, child benefit, free school meals, poverty thresholds (definition), personal allowances etc are all driven by "taxable income" figure.
    Recognising pensions and other salsac type deductions as part of "taxable income" will hit the lowest paid the hardest. As a result, the headline would be to have to significantly enhance some welfare / benefits, which is not the kind of thing a Conservative government would probably want.




    The consequence, largely unanticipated, is that taxpayer behaviour will change. If I can't sal sac down to the £100,000 level by way of pension contribution, then I will reduce my working hours to the same effect.






    "Fair" is clearly an emotive (and undefinable) principle.
    Current sentiment seems to be "Fair" = "rich people need to pay more".
    "Rich" = "those earning more than I".
  • Triumph13Triumph13 Forumite
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    User6565 wrote: »
    While no-one is going to weep for those on the 60%marginal rate (and higher still if you count the fact you’re over the threshold for tax free childcare where applicable) any changes will make a big difference to behaviour. At the moment there are strong incentives to put everything above £100k into a pension. If the tax relief goes we wouldn’t be doing the same in our household but would feel shafted at having to pay such a stupid rate of tax. There would be no incentive to push for bonuses or a bit of extra responsibility. I know that my husband’s salary comes with risk and he won’t necessarily be on those sorts of wages forever. If the government need people to be saving for their pension, there needs to be incentives to do so. I’m not convinced a 30% band for lower rate tax payers would change pension savings that much as cost of living is high and you already see people opting out of brilliant pensions such as the NHS scheme in high numbers.
    The government has no need at all to encourage people to save in their pensions beyond the amount required to avoid them needing to claim benefits. It doesn't have any need to help people with well above median salaries achieve well above median pensions.
    A reduction in the annual allowance seems pretty reasonable to me. Ideally it would be coupled with an extension to the length of time you can carry forward allowance for to still help the late catch up people.
  • zagfleszagfles Forumite
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    I believe the tax system in the 1970s used to positively encourage that approach. I can vaguely remember my Dad telling me that there were strict annual limits on pension contributions, based on an annual % of earnings. The % increased with age. It was explained to me because I wasn't eligible for a full student grant and he couldn't afford to top it up and pay the maximum into his pension! (I still feel very lucky in comparison to today's students).

    It's worth remembering how much can change over time in terms of pensions and tax relief.
    They were fairly low percentages though - ISTR the pre-A day maximums varied from around 15% to 25%.
  • zagfleszagfles Forumite
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    Interesting angle and a general change in sentiment.


    In the previous discussions on flat rate relief (2016?), the principle of tax neutrality was central to the discussion.

    Now the mood is "tax raising, by targeting the unfair higher rate relief that the government gives disproportionately to the better-off".
    Indeed, because the govt has promised an extra £20bn for the NHS without explaining where it's coming from, plus the recent promise to end "austerity" which the IFA reckons will be another £20bn.
    As an employee, there are very few ways of managing your tax, apart from
    - pensions contributions
    - charitable gifting
    - childcare vouchers
    - bike scheme.


    Of these, only pensions can make a significant effect on the "unfair" marginal tax bands/ rates.
    Tax isn't really supposed to be "managable".
    Benefits, credits, child benefit, free school meals, poverty thresholds (definition), personal allowances etc are all driven by "taxable income" figure.
    Recognising pensions and other salsac type deductions as part of "taxable income" will hit the lowest paid the hardest. As a result, the headline would be to have to significantly enhance some welfare / benefits, which is not the kind of thing a Conservative government would probably want.
    Other sal sacs are usually recognised because they come with a BIK. Also some low paid wiill be considerably better off eg those in a net pay scheme who earn below the persoal allowance and currently get no tax relief at all
    The consequence, largely unanticipated, is that taxpayer behaviour will change. If I can't sal sac down to the £100,000 level by way of pension contribution, then I will reduce my working hours to the same effect.
    Some will. As they do now - anyone claiming tax credits or UC or housing benefit or most other means tested benefits has a marginal deduction rate of at least 63%, usually higher.
  • ThrugelmirThrugelmir Forumite
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    Just leave the various annual pension contribution limits as they are. Then inflation will do the heavy lifting. Quietly and without any fuss.
    It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." — George Soros
  • edited 11 October 2018 at 7:18PM
    Rich2808Rich2808 Forumite
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    edited 11 October 2018 at 7:18PM
    Thrugelmir wrote: »
    Just leave the various annual pension contribution limits as they are. Then inflation will do the heavy lifting. Quietly and without any fuss.

    There is also an emerging and ongoing issue in terms of the annual allowance and lifetime allowance for those with public sector defined benefit pensions. Someone with long service who gets a promotion can easily now fall foul of the £40k annual allowance (as its based on the growth in their benefits not what they pay in each year) and some highly paid staff (e.g. doctors and GPs) are retiring early to avoid breaching the lifetime allowance so can actually be worse off in retirement by carrying on working for a few more years.

    Not necessarily expecting sympathy - but these can have unintended consequences as we have a shortage of GPs and doctors and we want to keep the experienced ones working as long as possible.

    Its of course easier to cut the AA and LA as no one really understands them - whereas cutting pension tax relief or getting rid of the 25% tax free lump sum is more easily understood even though the former can prove more costly to people's pensions over time.
  • hugheskevihugheskevi Forumite
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    The table below shows the salary at which a reduced Annual Allowance would be breached in the career average pension schemes of the main public service pension schemes.

    Salary at which a reduced Annual Allowance would be breached

    b6yhsi.jpg

    With an Annual Allowance of £20,000, huge numbers of public sector workers would routinely breach the Allowance. A Civil Servant earning £54,000 p/a would have a tax charge to pay. It might take a few years to exhaust carry-forward, but then there would be a tax charge every year, despite earning below the Child Benefit taper level.

    The figures are a best-case scenario. The threshold salary values would routinely be lower than this if, for example:
    • The member has above-CPI in-service revaluation of past career-average service (NHS and Teachers' Scheme)
    • The member has final-salary linked past service which has increased by more than CPI
    • The member is making external pension contributions, eg, to a personal pension
    • The member is making extra pension contributions, eg, Added Pension, Added Years, AVCs
    • The member has external income and is subject to the tapered Annual Allowance.
  • Triumph13Triumph13 Forumite
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    hugheskevi wrote: »
    The table below shows the salary at which a reduced Annual Allowance would be breached in the career average pension schemes of the main public service pension schemes.

    Salary at which a reduced Annual Allowance would be breached

    b6yhsi.jpg

    With an Annual Allowance of £20,000, huge numbers of public sector workers would routinely breach the Allowance. A Civil Servant earning £54,000 p/a would have a tax charge to pay. It might take a few years to exhaust carry-forward, but then there would be a tax charge every year, despite earning below the Child Benefit taper level.

    The figures are a best-case scenario. The threshold salary values would routinely be lower than this if, for example:
    • The member has above-CPI in-service revaluation of past career-average service (NHS and Teachers' Scheme)
    • The member has final-salary linked past service which has increased by more than CPI
    • The member is making external pension contributions, eg, to a personal pension
    • The member is making extra pension contributions, eg, Added Pension, Added Years, AVCs
    • The member has external income and is subject to the tapered Annual Allowance.
    Two possible answers to that.
    1 give up all pretense of taxing DB and DC the same by saying that the AA only counts for members of DB schemes in respect of limiting the amount of additional DC contributions they can make / the amount of tax free cash they're allowed. Someone accruing benefits regularly at those levels is probably going to be a higher rate taxpayer in retirement anyway so the tax is merely deferred; or
    2 apply a tax charge for breaching the AA but have it paid by the scheme and reflected in a reduction in the accrual rate eg anything over the AA you keep 80% of the accrual and the equivalent of 20% goes to HMRC.
  • zagfleszagfles Forumite
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    One advantage of flat rate is you could probably get rid of both the AA and the LTA. Pension conts would naturally get limited by people wanting to avoid higher rate tax in retirement, since they'd pay a higher rate than the relief they got. There would be no advantage in timing pension conts in particular years, for instance when paying higher rate tax, avoiding child ben charge, increasing tax credits, student loans etc. The TFLS would have to be limited, this could be set at 25% of the current LTA and frozen forever.

    Would obviously need something to deal with people already over the LTA.
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