Starmer's vision quest

[PurplePenguin]

It's probably worth setting out an example of why double taxation is off-putting.

If you earn £120k at the moment and put £20k in your pension. Then at the end of the year you have £100k which is taxed and £20k in your pension.

If pension relief was restricted to 20%, then you would have to pay an extra £8k to cover the additional tax (ignoring NI).

Then when you choose to withdraw the money, and ignoring the tax free bit, assume you are lucky enough to have income of £100k. The additional £20k which is withdrawn will result in £12k in tax.

In total, on your original £20k pension contribution you will pay £20k in tax. Yes, this is an extreme example, but it's not very appealing even in the event taxation is not 100%.

 

[First Aspect]

You don't get a higher Isa allowance because your are a higher rate tax payer.
It absolutely isn't back to front. The current system of pension tax relief is inequitable (and widens the wealth divide) - what justification is there for giving 40% or 45% tax relief to those earning more?

You've already paid income tax on money going into an ISA. It's just a different tax you are talking about now.

The argument is no more valid than saying that a hike in VAT isn't fair because it's the same no matter what you earn.

(Different debate on whether VAT is regressive, but you get the point.)

 

[First Aspect]

It's probably worth setting out an example of why double taxation is off-putting.

If you earn £120k at the moment and put £20k in your pension. Then at the end of the year you have £100k which is taxed and £20k in your pension.

If pension relief was restricted to 20%, then you would have to pay an extra £8k to cover the additional tax (ignoring NI).

Then when you choose to withdraw the money, and ignoring the tax free bit, assume you are lucky enough to have income of £100k. The additional £20k which is withdrawn will result in £12k in tax.

In total, on your original £20k pension contribution you will pay £20k in tax. Yes, this is an extreme example, but it's not very appealing even in the event taxation is not 100%.

The result of which is no pension contributions because you are better off investing in a stocks and shares ISA?

This then becomes a bit like an RRSP in the US or Canada, which is a low tax savings account that everyone pretty much raids while they are still working.

That about right?

 

[PurplePenguin]

The result of which is no pension contributions because you are better off investing in a stocks and shares ISA?

This then becomes a bit like an RRSP in the US or Canada, which is a low tax savings account that everyone pretty much raids while they are still working.

That about right?

No idea about US and Canada, but yes you are better off with cash under a mattress unless you are sufficiently close to retirement that you can take the risk on the 25% tax free bit.

Even then, if you take a more reasonable assumption of 25% tax on the way in (45%->20%) and 30% tax on the way out (75% of higher rate), then you would pay 55% overall which is still not very appealing. That might be preferable to cash under a mattress, but is still probably worse than a savings account.

 

[BoldonLad]

You don't get a higher Isa allowance because your are a higher rate tax payer.
It absolutely isn't back to front. The current system of pension tax relief is inequitable (and widens the wealth divide) - what justification is there for giving 40% or 45% tax relief to those earning more?

Is it not “swings and roundabouts”?

The higher earners get a greater relief as the pension is accrued, but, it seems reasonable to assume, more in = more out, so they will be taxed more when in receipt of the pension.

 

[bobzmyunkle]

So in summary, the current PM is useless but the alternatives are even worse?

You know what @Stevo 666, that might be the first time you've grasped what I'm saying.

 

[Pross]

So in summary, the current PM is useless but the alternatives are even worse?

Didn't stop the last lot changing their leader 5 times (unless I lost count) in 8 years although to be fair you could argue that after Truss the 'alternatives are even worse' became 'the alternatives are terrible but slightly better'.

 

[Dorset Boy]

The reality is that there aren't many people paying higher rate tax on their personal pensions.
There are many within the pensions and tax 'industries' that agree with me that a flat rate of pension contribution relief is much fairer.
It is highly unlikely to reduce pension contributions - the investment is still highly tax efficient, especially given you are able to manipulate the tax you pay on the way out under flexi-access drawdown.

I'm not sure PP's calculation is correct.
Assume Higher Rate threshold is at £50,000. Ignore Additional Rate tax.
Earn £120k, no Pension contribution then you pay £28,000 higher rate income tax (£120k - £50k x 40%), so net overall is £92,000

Under present system, pay £20,000 into pension, add £4,000 in tax relief = £24,000 gross pension contribution. Pay £20,000 higher rate income tax (£100k - £50k x 40%). Net position £104,000.

Under my proposal, £20,000 into pension becomes £25,000 gross contribution. 15% effective tax on £20,000 = £3,000, plus 40% tax on £50,000, so overall net position is £102,000

So not much worse for the higher rate tax payer.

 

[bobzmyunkle]

Andy Burnham?
Every time I go to Manchester, I'm appalled by the multiple new glass tower blocks. Others may disagree but to me it's a brave new world that I want no part of. Anyway

'Andy Burnham's Role (GMCA): As the Mayor and Chair of the GMCA, Andy Burnham's authority has provided hundreds of millions of pounds in taxpayer-backed loans to developers, most notably Renaker, a company responsible for building many of the city's luxury high-rise buildings, including the tallest building outside London'

So I can't be enthusiastic about Andy Burnham unless I find something to counter this.

 

[briantrumpet]

McSweeney is as much a genius as Dominic Cummings was.

 

[PurplePenguin]

The reality is that there aren't many people paying higher rate tax on their personal pensions.
There are many within the pensions and tax 'industries' that agree with me that a flat rate of pension contribution relief is much fairer.
It is highly unlikely to reduce pension contributions - the investment is still highly tax efficient, especially given you are able to manipulate the tax you pay on the way out under flexi-access drawdown.

I'm not sure PP's calculation is correct.
Assume Higher Rate threshold is at £50,000. Ignore Additional Rate tax.
Earn £120k, no Pension contribution then you pay £28,000 higher rate income tax (£120k - £50k x 40%), so net overall is £92,000

Under present system, pay £20,000 into pension, add £4,000 in tax relief = £24,000 gross pension contribution. Pay £20,000 higher rate income tax (£100k - £50k x 40%). Net position £104,000.

Under my proposal, £20,000 into pension becomes £25,000 gross contribution. 15% effective tax on £20,000 = £3,000, plus 40% tax on £50,000, so overall net position is £102,000

So not much worse for the higher rate tax payer.

You have included an additional 15% tax. I'm not sure where that comes from as I would have thought it would be at least 20% and possibly as high as 60%. Nonetheless, it's still an additional 15% tax.

 

[Dorset Boy]

The 15% is the effective tax you would pay on your net pension contribution - the diffence between your 40% income tax liability and the 25% tax relief on your pension contribution.
It's not an additional tax, it's a reduction from the 40% you would otherwise pay if you didn't make the pension contribution.

 

[Psamathe]

Re: Pension Contributions
Used to be the case that company makes contribution to your private pension fund not the employee and very tax efficient as that contribution (by company) is not subject to any taxation (eg corporation tax or then tax on dividends, NI, etc.).

No idea if it's still the case as I retired quite a few years ago now.

 

[PurplePenguin]

The 15% is the effective tax you would pay on your net pension contribution - the diffence between your 40% income tax liability and the 25% tax relief on your pension contribution.
It's not an additional tax, it's a reduction from the 40% you would otherwise pay if you didn't make the pension contribution.

Ok, so you're providing 25% relief rather than 20%. It is additional tax from my point of view (see worked example), because I will still be taxed on the way out. You've generously reduced the overall tax burden from 100% to 95% in my extreme example.

 

[Dorset Boy]

Re: Pension Contributions
Used to be the case that company makes contribution to your private pension fund not the employee and very tax efficient as that contribution (by company) is not subject to any taxation (eg corporation tax or then tax on dividends, NI, etc.).

No idea if it's still the case as I retired quite a few years ago now.

Employer pension contributions are a deductable business expense and are paid gross. They do not attract National Insurance.
Salary Exchange (or salary sacrifice as it used to be called) is attractive as the employee is saving NI as is the employer. There is then a negotiation to be had around who should bebefit from the employer NI saving. It's tax efficient as it is a way of boosting the pension contribution whilst not hitting your salary by so much. It is why it is now in Rachel's headlights.
It is also no good for the self employed.