Rachel Reeves to announce £20 billion cuts today

[HolgateCorner]

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 ?

I think there is an argument to say if you don’t pay more than £12570 into a pension you are being given 20% free money into your pension by the Government, so even more if you get 40% tax relief.

Even more unfair on people with very low incomes?

 

[Nano]

I think there is an argument to say if you don’t pay more than £12570 into a pension you are being given 20% free money into your pension by the Government, so even more if you get 40% tax relief.

Even more unfair on people with very low incomes?

No you aren't. You pay tax when you withdraw. Pensions aren't tax free. They are a defferal.

 

[HolgateCorner]

No you aren't. You pay tax when you withdraw. Pensions aren't tax free. They are a defferal.

That’s true but you get the benefit of the increased amount of money in your personal fund for a lot of years, so there is some benefit, plus the 25% tax free element. Higher rate payers will withdraw at probably a lower tax rate etc. There are some benefits to the individual but mainly the system is there to prop up the pension funds and ultimately the Government.

 

[gramercy]

That’s true but you get the benefit of the increased amount of money in your personal fund for a lot of years, so there is some benefit, plus the 25% tax free element. Higher rate payers will withdraw at probably a lower tax rate etc. There are some benefits to the individual but mainly the system is there to prop up the pension funds and ultimately the Government.

So do the HMRC if they’re taxing it after growth rather than before.
But if it’s being taxed on the way in and on the way out they’re really having their cake and eating it.

And on a 20% flat rate higher rate payers would withdraw at the same rate tax rate as they paid in at. Agree on the 25% element being a benefit, but if there’s talk of going after the relief rates, it’s not insurmountable that they wouldn’t go after tax free lump sum aswell.

 

[Nano]

That’s true but you get the benefit of the increased amount of money in your personal fund for a lot of years, so there is some benefit, plus the 25% tax free element. Higher rate payers will withdraw at probably a lower tax rate etc. There are some benefits to the individual but mainly the system is there to prop up the pension funds and ultimately the Government.

Putting money into a pension, investing and then paying tax on withdrawal or taking the money as income, paying tax and investing and then withdrawing is exactly the same.

Only difference is the 25% tax free lump sum which is essentially the bonus for not being able to access it until you are at 55+.

If you aren't saving on tax on the way into a pension then there is no need to put money into a pension (unless you are also getting a contribution from your employer).

 

[Matt]

Regardless of all this, there are people (and businesses) that are more "deserving" of the government focussing on when it comes to claiming and increasing taxation

I'll say again, this discussion just shows how eager we are to turn on ourselves when there's a perception of someone doing better than us when we're so close that in the grand scheme of things we're all the same

 

[Andy_W]

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".

You're right in what you're saying where tax at source or tax at the end end up in the same numbers you get in your pocket at the end. But you're still getting the 25% lump back tax free etc, that's a massive difference if people are fine waiting for it. Paying extra for the ISA route is the penalty of freedom I suppose.

But the main point is the guy paying 20% tax, deferring 20% tax isn't going to be getting the same benefit as the guy paying 40% tax, deferring 40% tax, as they both likely take it back out at 20% or less. It's a much bigger winner for the rich (like a 20% discount), which is why **** loads of rich people are doing it, or should be doing it, and they can afford to do it to (which the 20% guy probably can't as much).

I don't want to confuse things with public sector/ defined benefit, as I'm not in that boat, other than my old forces pension which I'm just leaving alone.

I'm gonna work this out more thoroughly for my own circumstances, as it's probably going to make more sense me putting more in a pension once I've got enough in an ISA nest egg to cover the house and to to cover the gap between potential retirement and to when a pension could be accessible.

 

[m3t4tr0n]

If a 40% tax payer is putting in £500 a month into a pension, that'll simply mean they would suddenly have to pay an extra £100 a month in tax. Having some people having to then pay 20% tax to invest in a pension and others paying nothing is not fair, it's punitive. I'd also take issue with the fact that 40% tax payers are somehow rich.

 

[Nano]

You're right in what you're saying where tax at source or tax at the end end up in the same numbers you get in your pocket at the end. But you're still getting the 25% lump back tax free etc, that's a massive difference if people are fine waiting for it. Paying extra for the ISA route is the penalty of freedom I suppose.

But the main point is the guy paying 20% tax, deferring 20% tax isn't going to be getting the same benefit as the guy paying 40% tax, deferring 40% tax, as they both likely take it back out at 20% or less. It's a much bigger winner for the rich (like a 20% discount), which is why **** loads of rich people are doing it, or should be doing it, and they can afford to do it to (which the 20% guy probably can't as much).

I don't want to confuse things with public sector/ defined benefit, as I'm not in that boat, other than my old forces pension which I'm just leaving alone.

I'm gonna work this out more thoroughly for my own circumstances, as it's probably going to make more sense me putting more in a pension once I've got enough in an ISA nest egg to cover the house and to to cover the gap between potential retirement and to when a pension could be accessible.

That's true that 40% rate probably only pays 20% on the way out but if they want access to all of it they have to pay 40% and if they want a salary the same as they had as income then some off that will be at 40%. I'm an ISA there is no withdrawal penalties and you have access to 100% of your savings.

 

[m3t4tr0n]

Regardless of all this, there are people (and businesses) that are more "deserving" of the government focussing on when it comes to claiming and increasing taxation

I'll say again, this discussion just shows how eager we are to turn on ourselves when there's a perception of someone doing better than us when we're so close that in the grand scheme of things we're all the same

Absolutely this. Like I said before, it's exactly what the truly rich want. Working people arguing with working people over (from their perspective and from the budget of a nation perspective) small change. A policy like this targets the wrong people.

 

[Andy_W]

That's true that 40% rate probably only pays 20% on the way out but if they want access to all of it they have to pay 40% and if they want a salary the same as they had as income then some off that will be at 40%. I'm an ISA there is no withdrawal penalties and you have access to 100% of your savings.

Yeah I get that, but after the 25% lump they will just take ~50k and let the rest compound and pile up. Probably won't be able to/ need to spend more than what they get from the lower rate, as they'll have money in all sorts of places. I can't imagine a higher rate payer is going to be spending the same they were when earning higher rate as will probably not be paying for kids and paying the mortgage etc.

I think they can pass them over to kids tax free too can't they, or at worst at the kids tax rate which is probably lower?

 

[Nano]

Yeah I get that, but after the 25% lump they will just take ~50k and let the rest compound and pile up. Probably won't be able to/ need to spend more than what they get from the lower rate, as they'll have money in all sorts of places. I can't imagine a higher rate payer is going to be spending the same they were when earning higher rate as will probably not be paying for kids and paying the mortgage etc.

I think they can pass them over to kids tax free too can't they, or at worst at the kids tax rate which is probably lower?

Which is why taxing inheritance makes much more sense because it encourages spending and not hoarding. It's also not the case if you have a defined benefit pension or an annuity so those people are penalised more by taxing them for contributing to a pension. Contributions are unavoidable for public sector schemes as well

 

[FabioPorkpie]

They really need to start teaching this **** at school (general financial awarensss, savings, pensions, tax etc) because as an adult I still struggle to get my head around most of it.

 

[masquesmog]

I think they can pass them over to kids tax free too can't they, or at worst at the kids tax rate which is probably lower?

I haven't read through this but if "them" refers to your pension fund (eg as in used for drawdown) these are exempt from inheritance tax, I believe. If you do pass it on, the kids are then taxed on any income they derive from the fund.

ISA funds aren't exempt. So, if you are in that lucky position and you want a better tax position for your kids, it is better to drawdown from your ISA, and leave as much as possible in the pension fund.

....... of course, a very lucky and rare position to be in ....

 

[1finny]

Interesting use of the word wealthy

I am in the higher tax bracket (40%) and certainly don't feel wealthy. I will admit that I am certainly more comfortable than some.

I also certainly don't feel like "I am getting a leg up" as I pay more tax (as a percentage), am not eligible for child benefit or childcare, am not eligible to use some of my wifes tax allowance, and my wife is not eligible to claim for some health benefits (that she would otherwise be entitled to) due to my salary.

Now I am not saying that the above is unfair, I believe in progressive tax and reducing benefits available to those who are more fortunate (and I am more fortunate, I agree with that). But where exactly do you believe I am getting a leg up?

Lets take it away from you and me for a moment.

Someone earns £150k a year and puts £60k in a pension. This isn’t an unusual scenario by the way.
The taxpayer reimburses them £24k
Further, if they are over 55 they can take out 25% of the £60k tax free.
That’s a further £15k benefit.

So, £60k put into a pension and the net they have paid is £21k - the rest is a funded by tax benefits.

If we are living in a society where we think that’s fair then I recognise I’m in a minority.

 

[Andy_W]

If a 40% tax payer is putting in £500 a month into a pension, that'll simply mean they would suddenly have to pay an extra £100 a month in tax. Having some people having to then pay 20% tax to invest in a pension and others paying nothing is not fair, it's punitive. I'd also take issue with the fact that 40% tax payers are somehow rich.

It's not "not fair", or more tax, it's just less relief (i.e less of a tax dodge), how can getting the same relief as someone on less money (say 20%) be not fair, when they're both going to be taking it back out at the same rate (say 20%)? Nobody is really going to be avoiding paying less than 20%, not when you also factor in a lot of their time retired will be bumped to the tax band by the state pension.

I know 40% tax payers are not necessarily "rich", I am one, effectively as a sole breadwinner, but it depends who you're comparing to. Most 20% tax payers would say we're loaded, and have a much bigger head start on a more comfortable and earlier retirement. A sole breadwinner on the bottom of the 40% band certainly won't be rich though, and might even have less than 2 people getting average wage.

 

[Matt]

Lets take it away from you and me for a moment.

Someone earns £150k a year and puts £60k in a pension. This isn’t an unusual scenario by the way.
The taxpayer reimburses them £24k
Further, if they are over 55 they can take out 25% of the £60k tax free.
That’s a further £15k benefit.

So, £60k put into a pension and the net they have paid is £21k - the rest is a funded by tax benefits.

If we are living in a society where we think that’s fair then I recognise I’m in a minority.

I guess it comes down to semantics

First off, if this person didn't contribute to a pension they would be paying almost £60k a year into the tax system - this shouldn't be forgotten. A sizeable portion of this income will be taxed at a marginal rate of over 60%

The taxpayer isn't reimbursing them (assuming salary sacrifice), they are just putting £60k of their income (this is important, this is their money that they have been paid) into their pension tax free, as is their right and their choice. If they don't do this via salary sacrifice then yes, there will be some reimbursement either by the pension company claiming on their behalf or adjustment of tax codes, but the net result is the same.

Your example lays this out as "the rich are getting reimbursements from the poor" whereas it's just someone who happens to have a good salary doing the responsible thing and saving money whilst he can. Whilst also paying a large amount of tax.

Compare this person with someone earning £40k - still a decent salary - who will pay around £7500 in tax. So the £150k guy is paying 8 times the tax of the £40k guy on less than 4 times the salary. And the £150k guy has to forgo (rightly, I might add) a whole range of benefits that the £40k guy can take advantage of.

Even if (as in your scenario) the £150k guy salary sacrificed £60k into his pension he would still pay around £27k in tax, which is 3.5 times the tax on just over double the salary.

Where is fair in that scenario?

 

[gramercy]

Yeah I get that, but after the 25% lump they will just take ~50k and let the rest compound and pile up. Probably won't be able to/ need to spend more than what they get from the lower rate, as they'll have money in all sorts of places. I can't imagine a higher rate payer is going to be spending the same they were when earning higher rate as will probably not be paying for kids and paying the mortgage etc.

I think they can pass them over to kids tax free too can't they, or at worst at the kids tax rate which is probably lower?

The vast majority of 40% tax payers will be earning an amount that means that they aren’t going to be worrying about limiting their pension draw down to £50k, as their total pension pot will fall well short of the amount needed for that figure.
If the relief went to a flat 20% the vast majority would be taxed at the same rate in and out.

 

[Nano]

Lets take it away from you and me for a moment.

Someone earns £150k a year and puts £60k in a pension. This isn’t an unusual scenario by the way.
The taxpayer reimburses them £24k
Further, if they are over 55 they can take out 25% of the £60k tax free.
That’s a further £15k benefit.

So, £60k put into a pension and the net they have paid is £21k - the rest is a funded by tax benefits.

If we are living in a society where we think that’s fair then I recognise I’m in a minority.

That's not what is happening though. The £60k just doesn't have tax applied now because the person is delaying when they receive it. There is no reimbursement. There is no payment from the public to the pension pot. Tax is paid when the income is received, which if taken as pension is in the future rather than now. You pay tax when you receive it. That doesn't seem unfair.

I don't think you should pay tax when you aren't even receiving the income and then paying tax again when you take it out of your pension. There's no point. You might as well just receive it as income now.

 

[1finny]

I guess it comes down to semantics

First off, if this person didn't contribute to a pension they would be paying almost £60k a year into the tax system - this shouldn't be forgotten. A sizeable portion of this income will be taxed at a marginal rate of over 60%

The taxpayer isn't reimbursing them (assuming salary sacrifice), they are just putting £60k of their income (this is important, this is their money that they have been paid) into their pension tax free, as is their right and their choice. If they don't do this via salary sacrifice then yes, there will be some reimbursement either by the pension company claiming on their behalf or adjustment of tax codes, but the net result is the same.

Your example lays this out as "the rich are getting reimbursements from the poor" whereas it's just someone who happens to have a good salary doing the responsible thing and saving money whilst he can. Whilst also paying a large amount of tax.

Compare this person with someone earning £40k - still a decent salary - who will pay around £7500 in tax. So the £150k guy is paying 8 times the tax of the £40k guy on less than 4 times the salary. And the £150k guy has to forgo (rightly, I might add) a whole range of benefits that the £40k guy can take advantage of.

Even if (as in your scenario) the £150k guy salary sacrificed £60k into his pension he would still pay around £27k in tax, which is 3.5 times the tax on just over double the salary.

Where is fair in that scenario?

Semantics indeed

We have a progressive rate of tax which is probably not fit for purpose.
If you look at income tax paid/payable for higher salaries you can make a case, as you have done, for fairness.

I’m in the really simple camp ignoring income tax and just focussing on pension contributions and tax relief.

I think we are both in different places and its probably best to end with an old quote…..
‘Fairness is in the eye of the beholder’

Can’t wait for the announcement and discussion on pensions being subject to IHT