Danny Alexander: it’s time to axe higher-rate tax relief on pensions to fund tax-cuts for lowest-paid

A couple of weeks ago, Nick Clegg signalled his determination to cut the taxes of the lowest-paid — now Lib Dem chief secretary to the treasury Danny Alexander is pressing for the tax-rise that would enable the Coalition to get on with it.

Here’s how the Telegraph reports it:

Danny Alexander, a Liberal Democrat Cabinet minister, says the better-off are receiving overly-generous tax relief when they invest money for their retirement. Mr Alexander’s proposals would see tax relief halve from 40 per cent to 20 per cent. He also wants workers on the minimum wage, who earn up to £12,500 a year, to pay no income tax at all. Mr Alexander claims that removing the higher-rate tax relief would save the Exchequer more than £7 billion and make the system fairer. Even restricted to those earning more than £100,000 the Treasury could save £3.6 billion.

“If you look at the amount of money that we spend on pensions tax relief, which is very significant, the majority of that money goes to paying tax relief at the higher rate,” Mr Alexander told The Daily Telegraph. His remarks may open up a new dispute between the Tories and Lib Dems over tax. They are already at odds over Lib Dem calls to keep the 50p top rate of tax and introduce a “mansion tax” on high-value homes. George Osborne, the Chancellor, is expected to strongly resist any calls to scrap higher-rate tax relief. …

Nick Clegg, the Deputy Prime Minister, wants to move “further and faster” with tax cuts for lower-paid workers — a move that would be funded by higher taxes on the better-off, but which had not been accepted by Conservatives.

At the Liberal Democrat spring conference next month, the party’s members are expected to pass a motion calling for cuts in tax relief for higher-rate savers, with the Chief Secretary likely to back it. “I’m willing to study that motion but I dare say I will [support it],” he says. “I wrote an election manifesto at the last election which proposed going considerably further for precisely the reasons of fairness that I’ve set out. As a Coalition government, we’ve made some decisions in this area already, which go in the right direction. When it comes to people on low and middle income, I am a tax-cutter by instinct.”

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  • Chris Rennard 11th Feb '12 - 11:38pm

    and the Sunday Telegraph reports that there will be no tax discount if you are married http://www.politicshome.com/images/1.1.Front_Pages/Tele11.02.12.jpg
    Lib Dems are clearly helping to make the tax system fairer than the Tories would make it or Labour left it. Chris

  • I am a higher rate taxpayer. If the Government removes higher rate tax relief on contributions, I will not contribute to my ludicrous defined-contribution pension but save in cash – ISAs etc. I wonder if this is what they want?

  • David – you would still get the benefit of the tax free lump sum and any employer contributions. In any cae, i doubt the govt minds whether you save through one route or another – why should it?

  • Actually, Boff Whalley put it in a nutshell:
    “We’ll get tax breaks, and call it philanthropy …”

  • Firstly I really don’t disagree with this plan, though I would like to see it part of a wholesale simplification of our incredibly complex tax system.

    Danny though should not as a public servant and an MP use the words over generous. Because he is in receipt of a most generous pension arrangement being paid for by the rest of us. He is metaphorically speaking, one of Orwell’s “Pigs” which is a point that needs to be made !

    Now to the meat.

    How are employer contributions to be dealt with and how are the final salary pension fund enjoyed for instance by MP’s like Danny’s going to be valued? If ignored it would grossly unfair and it will drive undesirable behaviours (salary sacrifice will become even more endemic). Final salary pensions are worth considerably more than money purchase for instance, but money purchase contributions are tangible, it cannot be fair that a civil servant should be allowed to build up an immense notional pension pot whilst simultaneously capping and taxing the less privileged private sector tax payers attempting to match it’s value using the annuity system.

    The pensions available to the ordinaries ie not public servants are dire constructs, inflexible, with hidden charges and subject to constant meddling by the likes of Danny, most sensible people wouldn’t touch them, except for the tax breaks. If these are removed or reduced then people will reduce their exposure to this product. This would potentially be very disruptive to the economy if the change was big. What I’m saying is that the cut in contributions would be material and would result in the pensions industry being hit very hard (they should be, but as a country that has consequences, people will be made redundant)

    I personally take the view that government spends (and wastes) too much money and it needs to concentrate on it’s core functions and execute them efficiently. In order to drive this behaviour as much as I can , I do not pay 40% tax. I salary sacrifice enough to get myself under the threshold. I do not intend to pay 40% tax even if I can no longer do this, I will reduce my working hours, spending less time at work and earning less. I may be in a minority here but I am illustrating that one cannot simply assume the revenues being put into pension will translate in an increased tax take.

    An example of driving undesirable behaviours…. Recently the amount you can earn before paying tax has been increasing and the amount you can earn before paying 40% tax has been decreasing. As this has happened I have increased contribution to my pension to keep me under that threshold and hence I’m in the agreeable position of both increasing the amount that goes into my pension and increasing the net amount that goes into my bank account after every budget., not I suspect what Danny had in mind would happen.

    Finally as an example of the meddling upon meddling that pensions have been subject to.., why do we cap the amount that can go into a pension and then cap the amount it can grow to? Surely do one or the other? I favour capping the input and ignoring the final value, if someone is outrageously successful investing, well good luck to them! Moreover anyone that shrewd is almost certainly going to stop taking the investment risk as the cap is approached, this again drives the wrong behaviour in my opinion.

  • Small follow up to illustrate my point. Mervin King was replaced to day and the subject of his pension was touched upon. He had a salary of just over 400K and pension contributions fo 144K, we pay this. In order to buy a defined contribution salary of equal value to his final salary one you would need a pot of 7 million. His deputy Paul Tucker has a salary of 200K ish and a pension worth over £5 million (in the same basis). His pension grew by £1.3 million last year (again if free market value is applied to the benefits). Ordinary people, that is peope not employed by the government would find this very close to the total. These two gentlemen are not even unusual, there will be loads of judges and senior civil servants with equally generous scheme values.

    I do not think any move can be justified on private pensions until public ones are sorted out, they are far more generous and an open ended public liability.

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