Connected Research

Union policy research in the 21st century

Posts Tagged ‘Tax relief

Pre-Budget Report and pensions

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The Pre-Budget Report contained some moves as regards pensions, including proposals to cap contributions to public sector schemes and for further cost-sharing measures at levels below the cap. Further details are awaited for both these.

About the other measures that did – and did not – appear in the PBR speech, predominantly the issue of the staged introduction of contributions into the new system of personal accounts, Nigel over at ToUChstone has a useful summary and comment.

Written by Calvin

09/12/2009 at 5:30 pm

Pensions industry continues to rattle on HRT

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Representatives from the pensions industry have today argued at the House of Lords Economic Affairs Finance Bill sub-committee that the Budget’s intention to taper tax relief to the basic rate for those earning from £150,000 to £180,000 from 2011 will have, in the words of the Association of British Insurers, a ‘damaging impact on pension saving in the UK.’

It is an established principle of pension savings that pension contributions are taxed on the way out, not on the way in: pension contributions are not taxed when you make them, but the pension they eventually pay you is taxed as normal income. So, tax on that part of individuals’ income is essentially deferred from the point where it is earned to the point where it is actually received. Individuals gain tax relief on pension contributions at their marginal rates: each £10 of contributions thus costs a standard rate tax payer £8; a higher rate tax payer £6.

Consequently, the bulk of the tax relief available goes to those who are higher rate tax payers: by itself, that’s not a particular problem given the principle that pension contributions involve essentially deferred taxation (that many higher rate tax payers in their working lives are likely to be standard rate tax payers in retirement is a slightly different point).

However, as Stephen Timms pointed out in the Commons, those earning over £150,000 represent 1.5% of all tax payers but receive one-quarter of all the tax relief: that’s a sizable imbalance that needs to be addressed from the perspective of tax justice. Timms also, and rightly, commented that this group of people had done particularly well out of the 2006 pensions simplification project, under which up to 100% of salary could gain tax relief up to an annual allowance and a lifetime limit which were both well beyond the reach of ordinary people.

Criticism of the move to taper tax relief for those earning above £150,000 to the standard rate from within the pensions industry has been trenchant: that the principle under which pension contributions are made has been broken since individuals could be paying tax on not just their own but also the contributions made by the employer on their behalf; that it is – essentially – the ‘thin end of the wedge’ under which all higher rate tax relief would be lost; that it adds additional complexity to pensions administration; that it (further) destabilises workplace provision on the grounds that those affected would lose all interest in providing workplace pension; that it wouldn’t bring in the expected amount of revenue anyway; etc.

Some of these criticisms can be dismissed as special pleading; in contrast, others appear to hold some water. In my view, Stephen Timms’s statement looks to provide decent evidence against the ‘thin end of the wedge argument; while it is clear that the argument over individuals paying tax relief on employer contributions made on their behalf applies only to the forestalling rules introduced from Budget Day to prevent people seeking to side-step the rules between now and 2011. Why executives seem to have lost interest in providing decent workplace pension saving schemes is open to  conjecture, but it is surely more likely to be the result of a realisation of the cost to their companies in the short-term of such provision than their own individual positions.

It’s clear that more heat than light has been generated in the debate thus far – though that’s probably been largely the aim of those who have got involved. Darling should stick to his guns, but that will demand a better articulation of the reasons why this is being done which takes head-on the criticisms being made.

Written by Calvin

20/05/2009 at 2:31 pm

Posted in Pensions

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