Rachel Reeves to announce £20 billion cuts today

[Matt]

Matt

I would guess 1Finny is referring to tax relief at 40%, if you claim this.

The issue the country faces is do we spend more on health and social care to meet growing demands and if so where does this extra money come from.

Yes, but I believe he was referring to it as "another leg up for the wealthy" and I was trying to make the point that I feel that a) I am not wealthy (I appreciate that this is all relative) and b) I feel like I am getting my legs taken out from me more than I am getting a leg up

I agree on what you're saying about the cost of health and social care, but as things stand I don't believe targeting people in the higher tax bracket in this way is the fairest way of doing it - especially as the tax bands haven't moved for a long time

 

[Matt]

Yes but if someone earned £50271, meaning £1 of their income was subject to 40% tax, if they put £1000 into a pension they don’t get 40% tax relief on the full amount. There’s no ability for anyone to pick which “pot” it comes from.

They’d get 40% relief on £1 and 20% relief on £999.

You're right that you can't pick and choose which pot it comes from, but you can decide where to start - e.g. do you start at the top end of the pay packet (where you pay tax at 40%) and work down (this is what we currently do), or do you start at the bottom end where you pay 20% and work up. This would mean that most people get up to £50k of pension contributions tax free. Higher rate payers would still be paying tax at 40% on earnings that used to be pension contributions.

I think it is much more difficult to start at the bottom and work up, because for a lot of people pension contributions are added before tax is taken, so there is no "pot" at that point

 

[HolgateCorner]

Yes but if someone earned £50271, meaning £1 of their income was subject to 40% tax, if they put £1000 into a pension they don’t get 40% tax relief on the full amount. There’s no ability for anyone to pick which “pot” it comes from.

They’d get 40% relief on £1 and 20% relief on £999.

That is correct but run the same argument for somebody getting 80k per year and putting 10k into their pension.

 

[gramercy]

That is correct but run the same argument for somebody getting 80k per year and putting 10k into their pension.

They’re left paying 40% tax on the remaining 20k,

if the pension rules changed to 20% flat they’d be paying another 20% on the money they paid into their pension aswell.

And they’d very likely be paying tax at 20% when drawing that pension.

 

[HolgateCorner]

Under PAYE tax is calculated after deductions, and that's right. It's insane to suggest that one person would have to pay 20% tax on their pension contributions whilst another pays 0%. For a great deal of people here, it's not about 'getting money back' it's about just not paying some tax.

We're doing exactly what the people we really should be targeting want. Working people arguing amongst themselves rather than clawing it back from the super rich who are offshoring the lot.

40% tax payers in general pay their share

I’m finding the discussion interesting because to me it is black and white that the tax relief should be a flat universal 20% but I do like to try to understand why others might disagree.

 

[gramercy]

I’m now wondering whether it would be fairer if you got taxed at your normal rate on contributions and paid zero when you come to withdraw?

 

[HolgateCorner]

They’re left paying 40% tax on the remaining 20k,

if the pension rules changed to 20% flat they’d be paying another 20% on the money they paid into their pension aswell.

And they’d very likely be paying tax at 20% when drawing that pension.

How are they paying another 20% on money going into their pension? This is a genuine question by the way I’m not just arguing for the sake of it.

 

[Matt]

I’m finding the discussion interesting because to me it is black and white that the tax relief should be a flat universal 20% but I do like to try to understand why others might disagree.

It has been a very interesting discussion, with very little of the obnoxiousness that does sometimes come across on here, so well done everyone for that!

 

[m3t4tr0n]

I’m finding the discussion interesting because to me it is black and white that the tax relief should be a flat universal 20% but I do like to try to understand why others might disagree.

Just flip it on its head. Remember again this isn't about getting any money back. Pension contributions are tax free. Why should one person pay 0% tax on their contributions and another pay 20%. That logic seems crazy to me.

 

[gramercy]

How are they paying another 20% on money going into their pension? This is a genuine question by the way I’m not just arguing for the sake of it.

Because I think if they were a 40% tax payer but only got 20% relief then those earnings will have been taxed at 40-20=20.

Again I’m not arguing, I’m still trying to fully understand it

 

[Matt]

Just flip it on its head. Remember again this isn't about getting any money back. Pension contributions are tax free. Why should one person pay 0% tax on their contributions and another pay 20%. That logic seems crazy to me.

This is where I am coming from

 

[Andy_W]

I don't think anyone is missing that, that's just how it works. The point is that higher rate earners would be paying 20% more tax on their pension contributions, surely?

Sort of, but I think it only works like that if they get 40% relief and then pay 40% to get it back out, and we know practically nobody does that.

So, lets say two people want to get their pension at 60:
Someone getting relief of 20% and someone getting relief of 40%, are likely to be both getting that back out at ~20% tax as a max. The bloke with 40% relief will do everything he can so he's not getting it back out in that 40% tax band, as it makes sense to do this.
But, you still need money to live, so even if they both take out their 25% lump sum, this comes out at 0%. That's likely to be a hefty chunk. Then if they take out 50k a year (which is a lot for someone who probably has paid off their house), they're only paying ~20% tax, and getting £3300 a month in hand etc. Even if the guy who got 20% relief can only afford to take 30k out, he's still paying ~20% tax. For the 20% guy the relief in/ out is probably the same, where as the 40% guy gets the difference in relief between in and out etc.

The 40% guy is also more likely to have other money/ investments in other places too etc, so will maybe be less reliant on the pension as the sole income, so can manipulate it to get the tax rates in his favour, for what he withdraws from his pension.

 

[gramercy]

I know I used an extreme example of someone £1 into the higher tax bracket and Holgate used someone on £80k putting in £10k.

But what if we closed the gap.
Say you had someone earning £49k and another person on £53k.
Personal situations aside they’re broadly similar incomes.

If they both put say £2k into a pension, under my understanding of the suggested 20% flat rate (40%-20%=20%). One would pay no tax, and the other would pay 20% on that contribution.
The person on £53k would then pay 40% on the remaining £1000 above the threshold.

 

[Scrug]

I can’t be arsed reading the entire thread, or doing my own research, but I’m on just over 30k a year. Am I worse off now?

 

[Nano]

I think they should only get 20% relief max (or whatever the lowest tax band is), it's still a big positive over the alternative of taking out the cash which is taxed fully at 40% and investing that yourself. Everything they're getting relief on would still be growing/ compounding, the benefit would be massive. The 20% relief is probably going to double in value in 10 years, at standard growth rates.

Don't forget this lot are probably maxing out their ISA to 20k per year also, and are getting 25% of their pension back as a tax free lump, so they're only ever really paying 30%, and that's if they're daft enough to draw their pension in the higher rate band, which is probably 4k per month. Who needs that much money when their house is paid off?

Pension with 20% relief would still be a big positive to a higher rate payer I think, if they're not planning on retiring before they can get access to it.

This is incorrect, and where the obvious problem starts. If you get 20% tax relief instead of 40% then it is likely when you do withdraw it at pension age that you will pay 20% to withdraw. You don't save tax by putting money into a pension, you defer your income until retirement. If the rate of tax now is the same as withdrawal after retirement there is no difference between taking it now and investing it in an ISA or putting it into pension and then withdrawing it at retirement. Both situations are identical except for avoiding NI and/or getting 25% free or the benefit of anytime access instead of waiting until 60.

There's also a big difference for people with defined benefit pensions. Public sector pay a fee and it is an increasing percentage based on how much they get paid but that is tax free so evens out. That would just be increasing contributions for high rate payers, like doctors, without them getting any difference in what goes into their pension "pot".

 

[sherlock]

Also have to remember the real risk that someone dies before they see a penny of their pension.

You can’t start taxing people on contributions now for money they might never get anyway.

Tax free contributions and then taxing it when taking it as income in retirement is the only fair way.

 

[gramercy]

Also have to remember the real risk that someone dies before they see a penny of their pension.

You can’t start taxing people on contributions now for money they might never get anyway.

Tax free contributions and then taxing it when taking it as income in retirement is the only fair way.

That’s true.
With an ISA if you got told you had months to live at sub 57 years old, at least you’d have the chance to access the lot and do something with it.

 

[HolgateCorner]

I know I used an extreme example of someone £1 into the higher tax bracket and Holgate used someone on £80k putting in £10k.

But what if we closed the gap.
Say you had someone earning £49k and another person on £53k.
Personal situations aside they’re broadly similar incomes.

If they both put say £2k into a pension, under my understanding of the suggested 20% flat rate (40%-20%=20%). One would pay no tax, and the other would pay 20% on that contribution.
The person on £53k would then pay 40% on the remaining £1000 above the threshold.

I think the difference in opinion comes from whether or not you feel or consider you have paid 40% tax on some or even all of your contribution.

My view is that, for fairness to all and regardless of how it is shown on your payslip, you should consider only that you have made your pension contribution out of your 20% taxed part of your income. So the £10,000 has come out of the 37k you pay 20% tax on.

Then the 20% flat rate would work.

Whether or not this is a disincentive to higher earners is a different argument but I am only talking about being fair in regard to this particular tax relief.

 

[HolgateCorner]

Also have to remember the real risk that someone dies before they see a penny of their pension.

You can’t start taxing people on contributions now for money they might never get anyway.

Tax free contributions and then taxing it when taking it as income in retirement is the only fair way.

I also think if there weren’t any tax breaks be that 20 or 40% the pensions industry and ultimately the Government would be in big trouble because people would just do their own thing with savings, ISA’s, investments or just spending it.

 

[m3t4tr0n]

I think the difference in opinion comes from whether or not you feel or consider you have paid 40% tax on some or even all of your contribution.

My view is that, for fairness to all and regardless of how it is shown on your payslip, you should consider only that you have made your pension contribution out of your 20% taxed part of your income. So the £10,000 has come out of the 37k you pay 20% tax on.

Then the 20% flat rate would work.

Whether or not this is a disincentive to higher earners is a different argument but I am only talking about being fair in regard to this particular tax relief.

But that's not how PAYE works. If this idea were to actually happen, everyone in 40% tax bracket suddenly starts paying 20% extra tax on their contributions, or more specifically has their 20% threshold reduced. In fact why start there, let's make it totally fair, let's take it from the first £12,570 then ?