At last! I’ll write up a fuller analysis later, but for now, here’s the announcement that I, and many others in the party, have been waiting for. Let’s skip over the £700-and-a-pony-for-all headline. This, friends, is a liberal tax measure.
The party will promise to raise the income tax personal allowance to £10,000 by closing tax loopholes exploited by big businesses and the wealthy.
Measures which will be used to pay for this proposed increase in the personal allowance include:
- Restricting tax relief on pension contributions to the basic rate
- Taxing Capital Gains at marginal income tax rates, allowing for indexation and retirement relief
- Tackling Stamp Duty Land Tax avoidance and Corporation Tax avoidance
- Subjecting benefits in kind to National Insurance Contributions as well as income tax and applying National Insurance to multiple jobs
- Switching aviation taxes from per person to per plane and increasing taxation on non lifeline domestic flights.
This proposal will eventually be put to conference to replace the current 16p basic rate cut package. I had hopes that the eventual offer put to the electorate might be a bit of a basic rate cut and a bit of a personal allowance raise. I didn’t dare hope the party would actually go the whole hog.
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32 Comments
This is brilliant news – raising the tax allowance was always a better option than cutting the base rate. 🙂
If I had a vote, you would have it.
Way to go, friends!
A solid, large proposal when and where it is wanted.
And there will be plenty more of LibDem mileage to come as it becomes clear tha this is the first, big, essential step to sorting out Gordon Brown’s Incredible Maze of means-testing and tax-credits.
And if I had a quart of Dublin Guiness handy, Guido would have it!
“Restricting tax relief on pension contributions to the basic rate”
So those that pay higher rate tax will in effect be taxed twice on their pension contributions, or they will opt for a salary sacrifice and employer funded contributions thereby reducing the tax take through lower NI payments.
Attempting to tax employer contributions would raise massive questions over public sector pensions.
In short, not very well thought out. I hope that the rest of the revenue raising measures are more considered but I doubt it.
@maas101, no. Currently higher rate taxpayers get two lots of relief on their pension contributions.
1. The same lot that basic rate taxpayers get – it gets taken out of your salary before it is taxed.
2. HRTs also get their basic rate band extended by the amount of their contributions. Effectively that saves them an extra 20% of income tax on however much they put into their pension.
Removing number 2 is what we’re talking about here, so that HRTs get the same amount of relief as BRTs.
@Alex
HRT payers do not get two lots of relief. All contributions go in tax free. When they retire they then pay tax upon any income from the pension. The taxation is in effect deferred as in most cases the fund is used to purchase an annuity. The income from the annuity is taxable.
If tax is paid on contributions then higher rate taxpayers are effectively being taxed twice as they will also be taxed when they retire.
You don’t address the issue that all who can would opt for a pay cut and employer contributions which would actually reduce the overall tax take rather than increasing it. Trying to close that loophole would result in a head-on clash between the public and private sector.
I’m hoping that the political whining between Labour and the Tories over the budget doesn’t drown this message out. This message needs to get out there!
As I was having a day off, I was on my way back from lunch when one of my electors, who recognised me, called across the road that he will definitely be voting for us at the next election on June 4th. This seems to have struck a cord with our electors.
The problem with removing the 4p-cut pledge is that it re-opens the gaping wound that is our local income tax policy.
The two combined meant our policy was to scrap the Council tax and make a small cut in income tax. Everybody wins
Without it the opposition can accurately accuse of us raising basic income tax for all by between 3-4% (as they did last time), even if with the allowance changes the net effect might be positive for some and negative for others, particularly medium to higher income working couples.
This unfortunately means we are back to an overall tax package that can be made to sound a lot worse than it is.
“HRT payers do not get two lots of relief.”
Yes they do, the second lot of relief is on their income tax, and will be stopped. The main tax relief, that which results from contributions going in to the pension tax free, will remain.
“You don’t address the issue…”
Hopefully it is now clear that I don’t need to?
@Neil Berry – no it doesnt because the other two parties are committed to a 5% income tax raise! (The 45% rate)
Alix
“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.
“HRTs also get their basic rate band extended by the amount of their contributions. Effectively that saves them an extra 20% of income tax on however much they put into their pension.”
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.
Hm, ok, I obviously haven’t explained the measure properly.
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?
@Mark Williams, “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.”
Could you say that again another way? Maybe I is missing something about this.
“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.”
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?
Alix,
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.
Alix,
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…
Alix:
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?
Andy,
No, the plan is that you get taxed normally on 52k but as you are a higher rate taxpayer you also get taxed 20% of the 3k you put towards your pension.
Of course if you work in the public sector and earn 52k plus a pension scheme that is notionally worth 3k a year you won’t pay any extra tax.
Does that seem fair to you? Because it doesn’t to me.
“..we should just abolish the upper rate…”
Hurrah!
“…which I take it no-one would be particularly keen on here?”
Oh damn! I spoke too soon.
Irrespective of the rest of the debate between Maas101 and Alix, Maas has a point about Pulbic Sector pensions.
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.
“so higher-rate taxpayers get the equivalent of a 40% contribution from HMT, whereas lower-rate tax payers get a 20% contribution.”
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.
Tom,
Regardless of the merits of sorting out the current system how do you stop employees taking a pay cut and agreeing that their employers will fund that amount into a pension, effectively giving them a non-contributary pension?
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.
We also have a huge deficit to pay off…. We should be looking to pay that down if the markets are going to take us seriously enough to help lower interest rates.
Also, where is Geoffrey and co calling for more spending??
Alix Mortimer Says:
20th April 2009 at 6:02 pm
“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.”
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.
“so higher-rate taxpayers get the equivalent of a 40% contribution from HMT, whereas lower-rate tax payers get a 20% contribution.”
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).
Alix, maas101,
The allowance goes up to £10k doesn’t it?
This means that some pay taxes at 40% now has no tax!
I cannot get excited by all this talk about pension contributions. I can see that someone on the NMW now gets to keep more of their wages. Correct treatment of the proposed change in national insurance will be difficult for those on low pay with two jobs.
This policy will be easy to understand by the public.
A new target to push for of no income tax on the NMW?
Local Income Tax? Well I always favoured LVT anyway.
If the individual is going to be taxed 40% on the proceeds of 75% of their fund in retirement (30% effectively plus restricted access) what is the point of them putting into a pension for tax relief at 20%?
If the relief is capped, the income in the future must be as well but this has not been said, idnicating th ignorance behins the proposals.
The tax rleif is to incentivise saving towards an income that can be only used for income in retirment, partly to prevent future dependancy on the state and also for the treasury to eventually get some share of the growth in future tax which other investment intruments may deny them entirely.
If it is unfair for one group to get a better deal than others 1. decide on a level of universal relief which I suggest is slightly higher than basic rate. 2. Nominate a tax rate at the other end that is lower in percentage terms.
If the relief is removed more people would do salary dacrifice and legislating against such a measure would screw up employer pension contributions completely art a time when we should be seeking to close the pension savings gap.
THATS GREAT FOR THE UNDER 65s WHO WILL GET £700 TAX FREE ALLOWANCE INCREASE IF LIBDEMS GET ELECTED, BUT WHAT ABOUT THE POOR OAP WHO WILL JUST GET £100 FREE TAX ALLOANCE INCREASE ?
THE OAP SHOULD GET THE SAME £700 INCREASE
IF NOT, I CANT SEE ANY OAP VOTING FOR LIBDEMS
Firstly, let’s get this straight, high rate tax relief on pensions only applies to earnings that have been income taxed at high rate in the first place. To quote direct.gov.uk: “If you’re on the higher tax rate of 40 per cent, you can get 40 per cent tax relief on your contributions. This relief is only available up to the amount of your income that is taxable at 40 per cent.”.
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?