Pensions Tax-Relief Thresholds

[Vixen]

There is an Autumn budget due end of October 2018. Chancellor, Philip Hammond is strongly expected to decrease the tax-relief threshold from £40K per tax year, to just £30K.

This will affect self-employed people, for example, who've ploughed their profits back into their business, and then plough them into a pension fund in the years leading up to their retirement.

Is it fair to target people maximising their savings?

Pension tax relief is a bonus paid by the government when you save into a pension to incentivise saving for your future. Pension savers get paid a top-up from the government, which is set according to their highest rate of income tax. For most of the UK this means: Basic-rate taxpayers get a 20% top-up on what they save Higher-rate taxpayers can claim 40% pension tax relief Additional-rate taxpayers can claim 45% pension tax relief.

Read more: https://www.which.co.uk/news/2018/10/autumn-budget-2018-is-pension-tax-relief-being-scrapped/ - Which?

 

[Francesca R]

(I know this is a really old thread, and that Hammond in the UK stepped back from reducing pension tax relief)

There is an Autumn budget due end of October 2018. Chancellor, Philip Hammond is strongly expected to decrease the tax-relief threshold from £40K per tax year, to just £30K. [ . . . ] Is it fair to target people maximising their savings?

It is "fair" (not everyone agrees but this is the metric) to target people with a lot of savings, because they have greater ability to fund the government. But someone who maximises their savings usually suffers less tax than someone who doesn't before and after any such change as this. Tax relief on pension saving has been coming down persistently for years, but it is still net tax relief. There's almost no tax relief on spending money instead (there is for making charitable donations)

Most people would think there is a point beyond which it is unfair to remove the tax relief on retirement saving, but then again many people who see that someone else is affected by any particular tinkering with the system will think it's OK, particularly if they actually benefit. Objective (impartial) fairness requires a level of indifference that all those affected do not have, and even then fairness is about ideas not facts.

 

[psionl0]

I don't understand why the government is putting any money at all into pension funds. If savers are making "after tax" contributions then that sounds like churn to me.

Surely the fairest system would be to just make contributions into a pension fund fully tax deductible (and any income earned by the fund tax free) while any withdrawals would be fully taxable income.

 

[theprestige]

(I know this is a really old thread, and that Hammond in the UK stepped back from reducing pension tax relief)



It is "fair" (not everyone agrees but this is the metric) to target people with a lot of savings, because they have greater ability to fund the government. But someone who maximises their savings usually suffers less tax than someone who doesn't before and after any such change as this. Tax relief on pension saving has been coming down persistently for years, but it is still net tax relief. There's almost no tax relief on spending money instead (there is for making charitable donations)



Most people would think there is a point beyond which it is unfair to remove the tax relief on retirement saving, but then again many people who see that someone else is affected by any particular tinkering with the system will think it's OK, particularly if they actually benefit. Objective (impartial) fairness requires a level of indifference that all those affected do not have, and even then fairness is about ideas not facts.

Fairness is always about ideas, not facts.

Otherwise you end up saying things like it was fair for Germany to carve out lebensraum in Poland, because that's where the land was. Fact!

 

[Francesca R]

Fairness is always about ideas, not facts.

Yes.

 

[Francesca R]

I don't understand why the government is putting any money at all into pension funds. If savers are making "after tax" contributions then that sounds like churn to me.

It isn't putting money in to (occupational) pensions it is relieving the tax it would otherwise have levied on the money folks put into them. But generally reducing the amount of this relief.

 

[psionl0]

It isn't putting money in to (occupational) pensions it is relieving the tax it would otherwise have levied on the money folks put into them. But generally reducing the amount of this relief.

That makes a little more sense.

I was mislead by the article which said, "Pension tax relief is a bonus paid by the government when you save into a pension to incentivise saving for your future".

 

[Francesca R]

That's the same doublespeak that would say that tax cuts are a gift/subsidy. It's used all the time all over the place.

 

[psionl0]

That's the same doublespeak that would say that tax cuts are a gift/subsidy. It's used all the time all over the place.

It's not exactly the same. A discount on the tax that somebody would otherwise be required to pay for whatever reason is a gift/subsidy - unless it is an unconditional discount that applies to everybody. "Pay" implies actually handing money over.

I get your point about doublespeak however. Politicians are apt to describe a discount as a "payment " to make it sound more generous.

 

[Francesca R]

I'm rather absolutist on this and disagree--a refund of tax isn't a gift unless paying the tax in the first place was a gift, which it wasn't.

 

[Aber]

Surely the fairest system would be to just make contributions into a pension fund fully tax deductible (and any income earned by the fund tax free) while any withdrawals would be fully taxable income.

For clarity: Yes that is the general rule in the UK.

The wrinkle is how it works in practice under the PAYE system.

To simplify things payments into pension funds are assumed to be net of basic rate tax (20%) ie pay in £80, and it is assumed that the payment is really a pension contribution of £100 and the pension provider recovers £20 from the government. No other adjustment is needed for basic rate taxpayers.

If you are a higher rate (40%) taxpayer, you pay in £80, and the pension provider recovers £20 from the government. On your tax return you state that you made a pension contribution of £100. You should have paid net £60, but actually paid net £80, so the government pays the difference back to you as a tax refund.

Tax relief for higher rate taxpayers is expensive for the government, both in timing (tax relief now, recovery 30 years in the future) and because relief on contributions is at 40% while it is likely that the tax on pensions in payment will be only 20%. Therefore all the attempts on limitations on tax reliefs on contributions.

 

[psionl0]

To simplify things payments into pension funds are assumed to be net of basic rate tax (20%) ie pay in £80, and it is assumed that the payment is really a pension contribution of £100 and the pension provider recovers £20 from the government.

That is what I mean by "churn".

The simpler way would be that the payer puts in £100 and gets £20 knocked off their tax bill. The PAYE scales can easily be adjusted to cover this and the pension fund doesn't have to hit the government for anything.

 

[psionl0]

I'm rather absolutist on this and disagree--a refund of tax isn't a gift unless paying the tax in the first place was a gift, which it wasn't.

It sounds like you believe that "taxation is theft" (which it probably is).

Regardless, there is no difference in the bottom line if you get a discount on your taxes or you pay the normal rate of tax and get a handout from the government. in practice, the latter involves churn and probably time delays as well.

 

[Francesca R]

It sounds like you believe that "taxation is theft" (which it probably is).

No, just compulsory (unlike gifts)

 

[Aber]

The simpler way would be that the payer puts in £100 and gets £20 knocked off their tax bill. The PAYE scales can easily be adjusted to cover this and the pension fund doesn't have to hit the government for anything.

In practice that is not simpler.

Under PAYE, basic rate taxpayers don't have to submit tax returns at all as it is assumed that everything goes through the employers payroll, and any pension contributions (outside employer's schemes) are done net of basic rate tax.