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    • MSE Karl
    • By MSE Karl 17th Oct 17, 12:47 PM
    • 128Posts
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    MSE Karl
    MSE Poll: Should pension tax relief be halved to 20% for higher earners?
    • #1
    • 17th Oct 17, 12:47 PM
    MSE Poll: Should pension tax relief be halved to 20% for higher earners? 17th Oct 17 at 12:47 PM
    Poll started 17 October 2017

    Should pension tax relief be halved to 20% for higher earners?

    Pensions are a powerful tax break – allowing and encouraging people to save for retirement from PRE-TAX salary – at a cost to the Treasury of an estimated 35bn/yr. In simple terms…

    For each 100 saved it only costs a…

    - Basic 20% rate taxpayer (salaries c. 11,500+) 80 from their pay packet
    - Higher 40% rate taxpayer (salaries c. 45,000+) 60 from their pay packet
    - Top 45% rate taxpayer (salaries c. 150,000+) 55 from their pay packet

    Some argue this is fair as everyone simply saves on paying income tax, others say higher earners do better as their tax gain is at least double. One idea mooted for the Autumn Budget is everyone just gets a 20% tax break, ie, a cut for higher earners, and a saving to the Treasury of over 10bn/yr.

    Do you think pension tax relief should be cut for higher rate taxpayers?


    Did you vote? Are you surprised at the results so far? Have your say below. To see the results from last time, click here.

    If you haven’t already, join the forum to reply.

    Thanks!


    This Forum tip was included in MoneySavingExpert.com's weekly email!
    Last edited by MSE Karl; 17-10-2017 at 12:55 PM.
Page 1
    • tgroom57
    • By tgroom57 17th Oct 17, 5:40 PM
    • 1,358 Posts
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    tgroom57
    • #2
    • 17th Oct 17, 5:40 PM
    • #2
    • 17th Oct 17, 5:40 PM
    Should pension tax relief be halved to 20% for higher earners?
    Originally posted by MSE Karl
    No. Previous governments have butchered the State pension system with the result that for any kind of pension -including any certainty as to when you might actually receive it- you are now all advised to get your own.

    So no. This idea of DIY pensions still hasn't taken off yet - vis the TV commercials of everyone ignoring the Pension thing, and to start taking it apart before it's taken hold surely spells doom.

    I have no problem with higher rate tax-payers getting a better deal - when they come to draw pension they will surely pay tax on it still, besides never living long enough to spend the pot. Meantime, their pension savings are surely the only investment money powering the economy.

    I'd leave things as they are. I'd like to draw a line in the sand in that the govt of the day can (and did) mess around all they like with the State Pension, but not with the DIY pensions. But I think pension tax relief will eventually go the way of mortgage interest tax relief.
    Save
    Last edited by tgroom57; 17-10-2017 at 5:45 PM.

    • funguy
    • By funguy 17th Oct 17, 6:07 PM
    • 570 Posts
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    funguy
    • #3
    • 17th Oct 17, 6:07 PM
    • #3
    • 17th Oct 17, 6:07 PM
    No - we should be encouraging people to save for their pensions. It is already taxed when collected so you cannot tax it twice! If taxed at 20% on way in, it should not be taxed when received on the way out...
    • Lorian
    • By Lorian 17th Oct 17, 6:38 PM
    • 4,771 Posts
    • 2,778 Thanks
    Lorian
    • #4
    • 17th Oct 17, 6:38 PM
    • #4
    • 17th Oct 17, 6:38 PM
    No. people should be encouraged to save for their pensions.

    And if they do change it, it will be political suicide for the Tory party.
    • ic
    • By ic 17th Oct 17, 8:22 PM
    • 2,655 Posts
    • 1,350 Thanks
    ic
    • #5
    • 17th Oct 17, 8:22 PM
    • #5
    • 17th Oct 17, 8:22 PM
    Nope leave as. The system is fair, I'll be proud to pay tax to the grave if I've saved enough to achieve that!
    * my posts are made in good faith and only represent my own opinion, experience or understanding of a situation.
    • pollypenny
    • By pollypenny 18th Oct 17, 7:56 AM
    • 26,133 Posts
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    pollypenny
    • #6
    • 18th Oct 17, 7:56 AM
    • #6
    • 18th Oct 17, 7:56 AM
    20% for all seems fair. After all pension income will be taxed in most cases.
    Member #14 of SKI-ers club

    Words, words, they're all we have to go by!.

    (Pity they are mangled by this autocorrect!)
    • batrachophagus
    • By batrachophagus 18th Oct 17, 8:32 AM
    • 44 Posts
    • 11 Thanks
    batrachophagus
    • #7
    • 18th Oct 17, 8:32 AM
    How would that even work?
    • #7
    • 18th Oct 17, 8:32 AM
    As far as I know, for a tax return things are either allowable deductions or not.


    I would be a 40% tax payer if I didn't fund my pension. Because I do my income drops below the 40% threshold and I pay 20%. How would 20% relief work?


    e.g. Salary 50k, Pension 10k, Taxable 40k - 11.5k Personal allowance = 5.7k Tax
    • Kavajo
    • By Kavajo 18th Oct 17, 8:52 AM
    • 117 Posts
    • 3,016 Thanks
    Kavajo
    • #8
    • 18th Oct 17, 8:52 AM
    • #8
    • 18th Oct 17, 8:52 AM
    No - higher rate payers are already penalised too much. They lose the personal allowance completely and there is a child benefit charge. It would be more to the point to smooth out the burden so that there are no income bands where tax payers face an extremely high marginal rate for any increase in income. And don't forget there is another 2% for National Insurance.
    • batrachophagus
    • By batrachophagus 18th Oct 17, 8:57 AM
    • 44 Posts
    • 11 Thanks
    batrachophagus
    • #9
    • 18th Oct 17, 8:57 AM
    • #9
    • 18th Oct 17, 8:57 AM
    20% for all seems fair. After all pension income will be taxed in most cases.
    Originally posted by pollypenny

    A pension is simply deferred salary - if you want to part tax it on the way in, you should part tax on the way out as well, and have destroyed the basic premise of pensions in the process.


    Sounds like it could introduce another tax cliff-edge* like married couples allowance, removal of child benefit, and withdrawal of personal allowance.


    * e.g. someone using married couples allowance earning 45,001 owns 230 more tax than someone earning 45,000 i.e. has to pay 23,000% on the last 1 earned (known as the "marginal rate").
    • batrachophagus
    • By batrachophagus 18th Oct 17, 9:05 AM
    • 44 Posts
    • 11 Thanks
    batrachophagus
    No - higher rate payers are already penalised too much. They lose the personal allowance completely and there is a child benefit charge. It would be more to the point to smooth out the burden so that there are no income bands where tax payers face an extremely high marginal rate for any increase in income. And don't forget there is another 2% for National Insurance.
    Originally posted by Kavajo

    You may be thinking of Top rate payers (currently 45%). Higher refers to 40% tax-payers and so starts at 45k this tax year, well below the personal allowance cliff-edge.


    It isn't an additional 2% National Insurance (unless you mean the historic SERPS change). NICs drop from 12% to 2% for income above 45k for employed people.


    I entirely agree about high marginal rates.
    • brendon
    • By brendon 18th Oct 17, 10:07 AM
    • 503 Posts
    • 444 Thanks
    brendon
    Pensions are not "tax-free" as many people seem to think. You pay tax on the way out, since a pension is to provide income post-retirement. It makes sense that INCOME tax is used to tax income! In this sense, the pension "tax relief" is no relief at all - it is just putting a higher or additional rate taxpayer in a fair position.

    It makes as much sense as moving tax relief for basic rate taxpayers to below the personal allowance (i.e. 0% relief). Most people would agree this is illogical.
    • chattychappy
    • By chattychappy 18th Oct 17, 10:12 AM
    • 7,096 Posts
    • 3,932 Thanks
    chattychappy
    What is disappointing is the way people's opinions are so governed by self-interest.

    Eg 24% of 40% tax payers agree, but 64% of 20% tax payers agree.

    Clearly the idea has some merit and some drawbacks. There are arguments on both sides. It's a pity that people can't step out of their own situation when judging an issue such as this.

    I can see more of this to come. You know, poor people thinking the rich should pay more. The rich thinking they pay too much already....
    • One-Eye
    • By One-Eye 18th Oct 17, 11:40 AM
    • 46,711 Posts
    • 7,175,057 Thanks
    One-Eye
    Absolutely Not. Pensions are taxed on receipt, not on contribution.

    Other restrictions are in place for higher earners.
    a) You can contribute as much as you earn in a year, up to 40,000 annually (including contributions from employers)
    b) Workers earning over 150,000 have their annual pension allowance gradually reduced to 10,000 once they earn 210,000 or more.
    c) A lifetime allowance of 1,000,000 puts a top limit on the value of your pension pot without having to pay a tax charge.

    Note that if you want a guaranteed income that rises in line with the cost of living and provides a payout to a spouse on death, a 1m pension pot could pay as little as 21,000/year.

    The biggest inequality in all this is the ridiculously over generous way this lifetime allowance is applied to defined benefit (final salary) pensions, where you could receive a pension over 50,000/year before it starts to have any effect.
    • robbiemann
    • By robbiemann 18th Oct 17, 12:14 PM
    • 31 Posts
    • 9 Thanks
    robbiemann
    Tax relief
    You missed the option of somewhere in between, why? Most proposals I have seen talk about a flat rate of 30 to 35 percent.
    • honeststeveo
    • By honeststeveo 18th Oct 17, 12:47 PM
    • 24 Posts
    • 1 Thanks
    honeststeveo
    Have to agree with chattychappy.

    It's a sad state of affairs when people are just voting with self interest.

    I bet most of those basic rate payers who voted to stay the same only did so because they expect to be paying higher rate in the future. And I bet many non taxpayers are housewives and husband's who's other half a are well into higher rate territory.

    Anyway the fact is that prior governments have given this relief to encourage people to save for their old age because of the state pension black hole.

    To cut the relief now would discourage pension saving and give the current treasury a big financial boost. Thus it would be the government of today stealing from the government of the future. Sadly this sounds like the sort of stunt UK governments have been up to all too often over the last few decades.

    • ex-pat scot
    • By ex-pat scot 18th Oct 17, 12:56 PM
    • 321 Posts
    • 448 Thanks
    ex-pat scot
    A couple of points:


    1. the choice of language used in the media.


    The government does not "give" or "top up" money in your pension pot. It merely doesn't charge you income tax (or NI, if using Salary Sacrifice). There's no flow from Exchequer into your pot. It's not a gift. It's a deferral, where you will pay tax once you actually access the money.


    [Apart from non-earners getting 700 from the Exchequer on 2,900 they deposit into a pension. That IS a gift. But it's not what's at stake here].


    2. Regressive rates of tax relief on pensions.
    The fact we have regressive rates of relief (ie greater rates of relief for higher paid) is a direct consequence of the tax regime that is progressive ie charges high earners more in terms of rate of tax.
    Those obtaining higher rates of relief are not somehow "advantaged" - it's they who are suffering the higher marginal rates of income tax and deferring (not avoiding) tax on their pension funds.


    3. trust. THis for me is the big issue. Even in the short term, i have little faith in the stability of the pensions regulatory / tax framework in areas including:
    - 25% tax free element
    - lifetime allowance
    - annual allowance
    - NI on pensions
    - changing the rules on when you can access pensions


    There are inequalities. The different way DB and DC schemes are treated for lifetime allowance is one. The continued attacking of LTA and AA, whilst ignoring existing large pots is another. The whole concept of the LTA, where good investment strategy is penalised and long term planning nigh on impossible, is another. The ludicrous envy that has resulted in the taper rules for incomes 150,000 - 210,000 is yet another. The whole system is spectacularly over-complicated.


    Touting a flat rate relief at 20% is also a fantastic sleight of hand - if you are a BR taxpayer using salary sacrifice, you are already getting 32% relief (42% if HR taxpayer), so why on earth would a flat rate at anything less than 32% be a good thing for anyone?


    A flat rate relief scheme would kill pensions dead for HR taxpayers, as they would be taxed partially on receipt and fully at withdrawal ie double taxed. The rational approach would be therefore to stop pension saving (good for exchequer in the short term), but have nothing for retirement (v bad for the state in the long term).


    And finally, pensions tax relief DOES NOT COST 70bn (or whatever figure) per annum. It reflects a deferral of tax, not a cost, and is essential to the long term financial wellbeing of our people.
    • batrachophagus
    • By batrachophagus 18th Oct 17, 2:43 PM
    • 44 Posts
    • 11 Thanks
    batrachophagus
    What is disappointing is the way people's opinions are so governed by self-interest.

    Eg 24% of 40% tax payers agree, but 64% of 20% tax payers agree.

    Clearly the idea has some merit and some drawbacks. There are arguments on both sides. It's a pity that people can't step out of their own situation when judging an issue such as this.

    I can see more of this to come. You know, poor people thinking the rich should pay more. The rich thinking they pay too much already....
    Originally posted by chattychappy

    I think the evidence comes down fairly heavily on one side, but why not share your view? By the way I'm middle-aged so my response is more to do with future generations who will already struggle to fund a reasonable pension with their student loans and large mortgages to repay.


    Changing the tax regime punitively would prompt less money to flow into pension funds, which invest in company shares, which grow the economy. If that money instead went into residential property for example and increased house prices some of the less well off (e.g. the young) would not be well served.


    It looks like the very worse kind of short-term thinking. I'm sure it is being considered by government though.
    • Stan Miguel
    • By Stan Miguel 20th Oct 17, 9:10 AM
    • 1 Posts
    • 0 Thanks
    Stan Miguel
    Taxed when drawn
    The reason you get the tax relief on paying into a pension is because when you draw your pension this is taxed at source and subject to PAYE and NI then. To tax contributions to pension schemes is to tax it twice.
    • ex-pat scot
    • By ex-pat scot 20th Oct 17, 5:25 PM
    • 321 Posts
    • 448 Thanks
    ex-pat scot
    The reason you get the tax relief on paying into a pension is because when you draw your pension this is taxed at source and subject to PAYE and NI then. To tax contributions to pension schemes is to tax it twice.
    Originally posted by Stan Miguel
    Not NI. Just tax.
    • XRAT
    • By XRAT 21st Oct 17, 8:17 PM
    • 198 Posts
    • 173 Thanks
    XRAT
    Thanks to 'DunstonH'
    Having been a 40% taxpayer for many years, after reading a thread on this site I decided to fund a S.I.P.P., draw a lower income and revert to 20% tax.
    I accumulated a fund sufficient to retire early. Instead of the government taking an additional 20% tax and squandering it on foreign aid, my S.I.P.P. is growing exponentially.
    I am currently drawing an income up to (but not into) the 40% tax bracket. Because I retired early, despite fixing the lifetime allowance, my pension will soon exceed that allowance in value.
    In short, my pension contributions mean that I will never be a burden on the state. Once I have drawn the lifetime allowance I will be taxed at 55% on the remainder and the government will receive far more than they ever would had I paid 40%.
    Evidently individuals can look after their own savings far better than the government.
    The foolish fail to recognise that tax relief is not a gift to the wealthy, merely a deferral of when the tax is paid, leaving the adept to grow their money better than government is able. The tax I pay will no doubt be used support those who don't save for themselves.
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