http://www.direct.gov.uk/en/Pensionsandretirementplanning/Companyandpersonalpensions/PersonalPensions/DG_10014696

Secondly, maas101 and TomP make valid points that haven’t been answered. How is it “fair” to tax high earners with contributory pension schemes and not high earners in the public sector? What’s to stop people using salary sacrifice to avoid the both the 40% income tax and save their employer 13% in national insurance contributions?

Nobody gets a “contribution from HMT”. Everybody gets a refund of the tax payable or already withheld on the income that they choose to alienate by diverting it into a pension fund, the proceeds of which will be taxable when they are paid out to the pensioner.

The current treatment is quite “fair” (I really hate that word when we have an inherently regressive tax system, but in tax matters fairness is mre a matter of consistency than one person’s notion of equity).

Ye-es, but by that logic we should just abolish the upper rate, which I take it no-one would be particularly keen on here?”

No one is suggesting that at all, and it doesn’t follow logically. I was merely saying that it is a ridiculous piece of spin to say that the personal tax allowance benefits those with higher incomes disproportionately. Everybody gets the same allowance on the first £X of their income and pays the basic rate on the next £Y (if any) of their income which is perfectly fair.

To come banck on the point of the denial of relief at the higher rate for pension contributions, you are clearly taxing income twice. When an employee makes a contribution to a pension pot, the money is clearly not available for them to use and indeed they may die before they become entitled to claim it.

Income tax is a tax on oncome and should be assess on an individual when the income actually becomes available (i.e. when the pension is paid), not when the employee becomes entitled to a vague promise of an indeterminate future amount.

If you want to treat the pension contribution as a post tax contribution of capital, then it would not be appropriate to treat the pension receipts as income until the pensioner had received the entirey of his/her contributions after which the excess would be treated as a distribution.

That is too complicated, so it is easier to stick with the existing arrangements.

Also, where is Geoffrey and co calling for more spending??

If the current rules are changed this will happen which will effectively become a net loss of revenue.

You cannot legislate for this in the private sector without also addressing non-contrib public sector schemes.

That’s my understanding. Isn’t it the case that if you earn 1p into the 40p tax band you can claim the 40% on your entire pension contribution for that year.

It isn’t technically correct to call it taxation deferred as you can take 25% of your pension pot tax free.

High earners enjoying non-contributory pension schemes will be the bane of future taxpayers’ lives.

Having said that, the fact that Public Sector pensions need sorting out is no excuse for perpetuating a system in which the richest citizens get a larger pension tax-credit than poorer citizens.

Re-entering the wider debate, unless I’ve misunderstood how tax and pensions work (and I may have done, in which case please put me right), one’s pension is considered to be paid at the margin and so higher-rate taxpayers get the equivalent of a 40% contribution from HMT, whereas lower-rate tax payers get a 20% contribution.

The current system is therefore regressive and deserves to be abolished.

Hurrah!

“…which I take it no-one would be particularly keen on here?”

Oh damn! I spoke too soon.

To illustrate. I am a higher-rate taxpayer earning £55k and I contribute £3k to my pension per year. Like everybody else, I pay tax in slices on my income, the first £5k-ish is not taxed, the next £35k-ish is taxed at 20% and the last £15k-ish at 40%. The extra relief I get is that £3,000 is added on to the middle £35k slice.

Thus my new slices are, no tax on the first £5k, tax at 20% on the next £38k and tax at 40% on the last £12k. So a chunk of my salary has been taken out of the higher rate band and put into the basic rate band. It’s my income tax bill which is lightened by this. Effectively I have saved myself 20% of £3,000 = £600.

Just a quick question, because I don’t know anything about moneys: If the hypothetical you in the above quote is paying £3k into a pension, then isn’t it just £52k that has to be considered? ie. shouldn’t it read…

To illustrate. I am a higher-rate taxpayer earning £55k and I contribute £3k to my pension per year. Like everybody else, I pay tax in slices on my income, the first £5k-ish is not taxed, the next £35k-ish is taxed at 20% and the last £12k-ish at 40%. The extra relief I get is that £3,000 is added on to the middle £35k slice.

Thus my new slices are, no tax on the first £5k, tax at 20% on the next £38k and tax at 40% on the last £9k. So a chunk of my salary has been taken out of the higher rate band and put into the basic rate band. It’s my income tax bill which is lightened by this. Effectively I have saved myself 20% of £3,000 = £600.

Or do I have the wrong end of the stick?

The one problem I have with these proposals is the extension of National Insurance to multiple jobs. The most likely people to have multiple jobs are those who have them to make ends meet. So, clobbering them with NIC’s doesnt strike me as very wise nor does extending NIC’s in a climate of high unemployment.

Apart from that I do feel they are solid proposals…

I see what you are getting at but you still haven’t answered my question. How will you tax those that choose to take a pay cut and have their employer fund that difference into a pension yet not tax those who have tax-free public sector pensions?

A fair society should mean just that, it should not further highlight the divide between the public and private sectors which will be one of the key battlegrounds in the next election.

Ye-es, but by that logic we should just abolish the upper rate, which I take it no-one would be particularly keen on here?

Could you say that again another way? Maybe I is missing something about this.

All pension contributions go straight into your pension tax free, right? Whether you’re a higher rate or basic rate taxpayer you don’t pay tax on the amount you contribute. That doesn’t change under the Lib Dem plan.

But for higher rate taxpayers, there is an extra rule. When a higher rate taxpayer pays an amount into their pension (let us say, £3,000 in a year), that amount is taken and added on to the amount at which they pay basic rate tax.

To illustrate. I am a higher-rate taxpayer earning £55k and I contribute £3k to my pension per year. Like everybody else, I pay tax in slices on my income, the first £5k-ish is not taxed, the next £35k-ish is taxed at 20% and the last £15k-ish at 40%. The extra relief I get is that £3,000 is added on to the middle £35k slice.

Thus my new slices are, no tax on the first £5k, tax at 20% on the next £38k and tax at 40% on the last £12k. So a chunk of my salary has been taken out of the higher rate band and put into the basic rate band. It’s my income tax bill which is lightened by this. Effectively I have saved myself 20% of £3,000 = £600.

Removing that relief means I no longer get to pay a bit less income tax, but it doesn’t affect my pension contributions, or the fact that they’re tax free.

So my pension continues growing with tax-free status in exactly the same way as before. There is thus no sudden new advantage in switching to a salary sacrifice arrangement. Such a switch would not be an outcome of this policy.

Of course, some people do put the extra income tax saving into their pension pot as well (in my case the £600). Is this what you’re referring to? If so, it doesn’t stack up with the rest of what you’re saying. That £600 has effectively been given back to me in a tax cut by the state. It’s not saving the state anything if I invest it back into my pension.

That felt rather long (as the actress said to the bishop). Any clearer?

So the higher rate tax payer still gets taxed on the excess of the higher rate over the basic rate on amounts that he doesn’t actually receive if the contribution is deducted at source and is then taxed again on payments from the pension fund, effectively taxing that income twice. Not a good idea.

I also balked at the following Cleggism:
“If you’re an upper earner, you get twice as much tax relief – don’t make all other taxpayers pay for relief of the upper earners who are doing very well anyway”

You only get “twice as much tax relief” because you happen to be paying twice as much tax on your marginal income. It takes a real victim’s psychology to think that way.

“Hopefully it is now clear that I don’t need to?”

It is far from clear. Taking a pay cut and then having an employer fund that amount into a pension would remove the NI that would have been paid. Any attempt to tax that system would lead to comparisons with the generous tax-free public sector pensions.

Private sector pensions took a massive hit from Gordon’s removal of ACT relief.

I am all for raising the personal allowance to £10,000 but not at the expense of those who are prudently attempting to not burden the state upon retirement.

Right now the private sector is taking all of the pain of this recession. Address the gold-plated public sector pensions then, when you have done that, maybe the proposal will have merit.