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Claire Trott: Latest tax relief rumours are most worrying yet

The Chancellor’s rumoured “tax on age” Budget announcement would present a whole host of problems

 

With the next Budget firmly in sight, the rumours of culling higher rate tax relief are rife. This time, we are hearing it may just be older people that will see the cut, with the young reaping the benefits of a “tax on age”.

I have been quite vocal in the past about the issues I see with flat rate relief or the removal of up-front relief, but this is on another level of complexity.

If this really is something being considered, I can only hope there is a thorough consultation with the pension profession to establish whether it is workable. I do not think it is.

Just taking the issue of employer contributions in isolation shows what we would have to deal with should it become policy. Indeed, this is one of the biggest issues with any change to personal tax relief on pensions.

Although it would appear some of the suggestions simply ignore employer contributions as if they are a completely different issue, they are not and need to be considered as part of the bigger picture.

Should there be a cap on personal tax relief, then what is stopping an employer from changing all their contracts to include a non-contributory pension scheme with a lower salary? Employer contributions to pensions form part of an overall remuneration package and, as it is not taxed as salary, it is effectively a tax-free payment to the individual, which means the payment gets full marginal rate tax relief. Not to mention employer pension contributions are not subject to National Insurance.

This means they will need to be monitored. The annual allowance is not sufficient for this because, although it is used to cap overall tax relievable pension contributions, it does not test personal tax relief. The complexities of pension tax relief is why we have the annual allowance in the first place.

So, what are the options? Firstly, we know salary sacrifice would have to go but how do you deal with the example of a complete change of employment contract? Employer contributions would need to become a type of benefit in kind to ensure the individual is not receiving any tax relief they should not. This would add a lot of complexity to the calculations required by advisers, individuals, employers and HM Revenue & Customs, which will always end up costing money to monitor.

I know the suggestion is that we do away with tax relief and replace it with a Government funded top-up but this is really just the same and does not get away from the problems above.

This is one of the biggest issues if we are only looking at defined contribution schemes but once you factor in defined benefit schemes and the complex funding of those we could end up with multiple tests on contributions both personally and by employers. This would increase the complexity once again, which is never an encouragement to anyone to save.

Claire Trott is head of pensions strategy at Technical Connection

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Increasing tax for older people should be illegal as an infringement of human rights. The 75 issue should be considered in the same light.

  2. @Ken Durkin
    I agree totally

  3. As with all things, not all are equal and not all baby boomers did so well you only have to look at the endowment fiasco or mortgage ISAS for a start for many born around mid 50’s it has been a total disaster. 3 massive recessions put paid to any hope of wealth in retirement.

  4. Sounds like age discrimination and unworkable no matter how bad an idea it is.

  5. Baby boomers (perceived) wealth aside…..when is it that individuals have more available income to invest in a pension….umm, that’ll be after they’ve partied, holidayed passed their driving test etc in their twenties, saved up and possible bought a house (or rented), got married, had kids and the just perhaps they’ll be able to save in a pension!! The Government aren’t stupid (despite how they act!) and know this, so saying they’ll give the younger more tax relief may win votes, but as most of them don’t have enough money to put in a pension, this won’t cost the Govt a penny, plus they’ll save huge amounts of tax relief on those actually trying to make a difference to their pension – as encouraged by the Govt to take the strain off the state!

    Rather than pretend and pish about, either just bl00dy reduce tax relief to basic rate or the annual allowance to £10k and be done with it and keep it simple!!!!!

  6. It’s all very well to mess about with pension tax relief, because the chancellor needs a short term fix to plug the gaps. But the cost of providing pensions and top up SS benefits, has always been much greater. I am quite sure the Work place pension will disappear one day as all, government style pensions have, graduated, Castle Sheme, SERPS to name but a few. In a few years time whichever government is trying to run the country, they will look at all that money going into nest etc and divert it into the treasury, with yet another long term promise or should I say lie to go with it.
    Nothing is ours any longer, maybe the use of it in our life time, but stolen by the government on death or duabeIment I am please to say I won’t be hear to many more years, even the rats are leaving the stinking sinking ship.

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