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Labour to target higher-rate pension tax relief

Labour has set its sights on higher-rate pension tax relief, declaring that too much Government money is being spent on the pensions of higher earners.

Speaking at a fringe event at the Labour conference in Liverpool this week, Shadow pensions minister Rachel Reeves said the Government should look at redistributing some of the £20bn a year it spends on pension tax relief.

She said: “We spend £20bn a year on tax relief for pensions and two-thirds of that goes to higher-rate taxpayers. Half the population get just 10 per cent of that £20bn. So I would like the Government to look at ways to make pension tax relief more efficient, more effective and better value for the taxpayer in incentivising the people who most need to save.”

National Association of Pension Funds chief executive Joanne Segars said: “We need to remember we are talking about tax relief here. There are a large number of people who get higher-rate tax relief on their contributions but they also pay tax at a higher rate when they retire and we should not lose sight of that.”

In 2009, Labour proposed a reform of higher-rate pension tax relief which would have seen relief cut for people earning over £130,000.

The complex measures were scrapped by the coalition Government which instead implemented a £50,000 annual allowance while continuing to allow individuals to receive relief at their marginal rate. It also announced a cut to the lifetime allowance from £1.8m to £1.5m from April 2012.

Scrapping higher-rate relief was a LibDem policy before the election and was promoted by current pensions minister Steve Webb.

Hargreaves Lansdown head of pensions research Tom McPhail says: “If Labour are going to raise the issue of tax relief, it is essential they look at the broader pensions tax landscape rather than simply looking at higher-rate relief in isolation.

“Making it fairer will be harder to deliver than it is to speculate on and I am not convinced now is the right time with automatic enrolment starting next year.”

For full financial services coverage of the Labour conference, see this week’s Money Marketing.

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Comments

There are 25 comments at the moment, we would love to hear your opinion too.

  1. OK, lets look at the simplistic solution –
    scrap tax relief and scrap tax on pension payments. Is this too simplistic?

  2. Same old rubbish from Labour.
    Not thought through as usual.
    Anything to take a swipe at the oppositon, when in reality had they done the sensible thing during their time in power we would not have seen the terribel mess that the middle to lower earners are in now.
    Do they really think that the lack of ability to save will be eased by giving tax relief?
    If you cant afford to save what use is tax relief?
    Far better to look at a lower rate of tax on pension income!
    This is the time when it really matters.

  3. Should we be surprised that Labour are looking to plunder our savings again – they spent 13 years doing it when in power.

    They won’t redistribute to other savers – they’d just use it to create more pointless public sector jobs or spend it on vast useless computer systems.

  4. This old chestnut again.
    The Government doesn’t ‘spend’ any money on tax relief, as it simply pays back the tax that was paid on the income to pay the pension contribution.
    Half the population gets ‘just 10% of the £20bn, as that is all they have paid.
    Anyway, this goes completely against what Milibland said yesterday about rewarding those who work and achieve. Not everyone who is a higher-rate taxpayer has been given the money

  5. “declaring that too much Government money is being spent” – correct, on the final salary benefits of the good for nothing MPs, continually lining their own pockets on the back of the high earners paying higher rate tax intorduced by the Labour government, you can’t have it both ways!

  6. In theory and for fairness it is a good idea redistributing the tax relief, but in reality higher rate tax relief will be cut to prop up spending in other areas.

    I have allways thought tax relief should be given on size of fund perhaps age related, i.e match contributions until fund reaches say £18K triviality limit, 50% match until fund reaches £50K and withdraw it completely at say £100K.

    Also they could the government could think long term and guarantee annuity rates for first portion of funds.

    It would work out cheaper in the long run as less means tested benefits would be paid in retirement.

    It is just my thought!

  7. Let us just hope that this complete lack of imagination or attempt at a new solution to encourage the whole population to save for their futures will be some time in ever coming to the table.
    Please try a little harder if you want to be taken seriously Labour.

  8. The trouble with Miliband (and, if the truth be known, all politicians) is that they think that they are spending THEIR money when granting tax relief on pension contributions.

    Unless you live on planet Zog like Miliband, the truth is that the money earned by an individual belongs to that person in the first instance, and the government then decides how much of it they want to rob from the individual to distribute to wasters, immigrants, bomb makers and incompetent quangocrats (after lining their own pockets).

    There was a dozy bird at the Labour conference saying that if jobs go in the State sector then the private sector will lose out because there will be less money being spent by out-of-work policement, teachers, nurses etc. Whilst that’s true it didn’t occur to her that it is the private sector which generates the wealth that pays for nurses, policement and teachers in the first place. It is not a chicken and egg argument !

    As far as the dopey bird was concerned it is the State that produces the money which is distributed to those working in the State sector, who then spend their wages to support the private sector. When this is the distorted view of so many lefties (of how our economy functions) there is no hope that they will see sense when deciding whether to strike against the cuts.

    Back to pensions, higher rate tax payers already pay more than their fair share towards government infrastructure simply because they earn and spend more (even if the marginal rate of tax didn’t increase beyond £40k pa). And, if there is no 40% tax relief on pension contributions – WHY BOTHER to make contributions anyway ?

  9. Well – if they hadn’t removed Dividend Tax Relief from pension funds then a) pensions would be better than ISAs for basic rate tax payers b) there wouldn’t be as much of a national pension shortfall.

    Mind you I don’t see the current Government reinstating it either!

  10. Labour says “To much Government Money is being spent on high rate tax relief”

    Yet they are quite happy to spend £1 TRILLION of Government money on public sector pensions including those of MPs.

    Also I like to remind Labour that it is not Government Money but taxes paid by hard working private sector wealth creating citizens

  11. @Bill Wells – Is casual racism and sexism of the kind you’ve portrayed here really appropriate in this kind of forum?

  12. This statement tells you everything you need to know about the mind-set of Labour politicians and the extent of their fiscal incompetence.
    The government does not “spend” £20 bn a year on tax – relief. By its very nature tax relief means not paying tax that would otherwise be payable. To justify using the term “spend” it would need to be the actual transfer of tax revenue from one group of individuals to another. There is a world of difference, but the Labour mind set is that not recovering tax from individuals on part of the income they have earned is the same as paying out benefits from tax received.
    The whole basis of higher – rate tax relief is that it should compensate for the fact state pension benefits are capped. Why should a higher – rate taxpayer effectively pay far more than a basic rate taxpayer for their basic state pension? And why should a higher – rate taxpayer effectively pay even more for a capped earnings related pension component than a basic rate taxpayer?
    Higher rate pension tax relief is a modest way of ensuring that those that pay the highest amount of tax can make additional pension provision without the government charging more and more for less and less. And don’t forget that this additional provision inevitably falls outside of the feather – bedded earnings related schemes enjoyed by public sector employees,which are effectively entirely funded by private sector employees.
    Long may Ms Reeves remain a “shadow” minister….

  13. M. Reynard – public sector workers pay taxes in the same way as private sector workers. So your arguement that public sector schemes are ‘entirely funded’ by private sector employees is incorrect.

  14. Open letter to Rachel Reeves MP

    I’ve just seen an article on Money Marketing which refers to a recent call by yourself for higher rate relief on pensions to be further restricted.

    As was pointed out in the article, it would be inequitable to deny higher rate relief to people, who then, in many cases, would be expected to pay higher rate tax on their pension income. I’m sure that I don’t need to point out that a great many ‘middle income’ earners, including many professionals in the public sector, now pay higher rate tax. Indeed, with the restriction in the growth of the higher rate band under the last labour government, a great many more people were bought into higher rate tax.

    It was the last government that bought in ‘pension simplification’ and allowed contributions of £255,000! Then subsequently and belatedly trying to restrict higher rate relief for those earning more than £130,000 with the most complicated and labyrinth set of rules. The present government has taken a much more straight forward and sensible approach by limiting contributions to £50,000 p.a.

    There is a more fundamental and important significance to this argument though, higher rate payers are not getting any more than anyone else or any greater benefit than anyone else. All they are being allowed to do is put money into a pension out their gross income, before tax is calculated. If it is inequitable for them to receive higher rate relief, then it is inequitable for them to be asked to pay higher rate tax. Your argument about the cost of higher rate tax-relief would only hold water if you start from the position that all income in the UK belongs the government and people are lucky to hold on to any of it. Higher rate relief is not a cost or a loss to the exchequer, it is just money that the government hasn’t been able to get its hands on.

    There is a general distrust of government in the UK and of politicians in particular. There is little wonder, when all that most people can see is politicians scheming to obtain even more of the money that actually belongs to the people that earned it, than they already do.

    I advise both standard rate and higher rate tax-payers and I can tell you that all the standard rate payers can perfectly well understand that higher rate payers are not getting more benefit than themselves, it is exactly the same, gross input with marginal rate relief.

  15. Nick Howarth Pulleyn 28th September 2011 at 1:20 pm

    Maybe it’s just me but the tax regime is all a bit complex. Try this instead…

    No tax on saving/investment income
    No tax relief/dodges on saving/investment/wealth
    No VAT

    Commensurately increased income tax, fairly graduated.

    Any takers?

  16. True story – albeit historical.

    Get a phone call from an accountant who introduces clients to me. It’s about two days before the tax year end.

    “Mike, have you got time to get out to “A*******’s shop, he can’t get into your office.”

    “How crucial?” I ask – “Tax year end, and just like you, I’m kinda busy!”

    Accountant replies “You decide – just finished his tax calcs, and we need to put £50,000 into his pensions!”

    “On my way”, say I.

    I have known the client since he was born, at age 16 I opened his first Building Society Account with £5.00 a month out of his pocket money, now in his thirties he now owns and runs a group of pharmacies.

    I have set up a series of personal pensions, all single premium inputs, most just like this, a rush at the end of the tax year.

    I arrive at his shop, and we go through to the rear We are part way through completing the first of 5 proposals, and he needs to leave for a moment. Same again, on the second proposal, he has to exit and return. Same again on the third, the fourth and the fifth.

    The reason for him having to leave and return?

    As the pharmacist, he has to measure each individual beaker of methdone, and witness it being consumed.

    Each of his pharmacies is located in a very deprived area where drug and alcohol abuse is prevalent, where life expectancy is low with the simple consequence that there is a high consumption of medicine of all kinds..

    Approximately 85% of his business turnover came from the NHS for the dispensing of medicine, and a high percentage of that was indeed methadone related.

    Yes, I got the proposals and cheques in on time for his higher rate tax relief to be granted.

    Moral to this story?

    I have mine, and it hasn’t changed in all the years that have elapsed since.

    I leave you to form yours.

  17. If Milliband and Balls are anything to go by,they would force this through in the belief they were right!
    Blair,Brown,all over again.

  18. He can’t see that when the pension benefits are taken HMT should get more tax than it was relieved of?

    I once sent him an email with the subject title ‘LoadaBalls’ in relation to his crazy ‘policies’ that were being handed down to the FSA for implementation. I regretted it afterwards, for a couple of seconds.

  19. Leaving aside issues of fairness and poor presentation the idea here is to increse the take from income tax.
    The politicians have to come up with a credible sounding way to plug the defecit, oh and not upset potential voters, Higher rate tax relief an easy target.

    Fiscal drag menas that many people who now pay higher rate tax and not what I would describe as rich, (Teachers, policeman, back office staff!).

  20. Tax relief stimulated pension investment but with the decline of defined benefits schemes, partial replacement by inferior contribution schemes, bad press and people preferring to borrow and spend now rather than save for a rainy day/retirement – pensions for people who really will need them is low priority.
    Tax relief is no longer an incentive if the vast majority of people cannot save anyway, so why offer relief to people who can afford to save.
    The argument that higher rate taxpayers will pay HR tax into retirement does not wash with me; many revert to basic rate tax with the exception of a few.
    This present Governments belief that rewarding the super rich will make them work harder is a myth.
    If I won a Million pounds I would STOP work and set up some trusts to minimise my personal tax, I certainly wouldn’t work harder and I won’t be employing people either.

    Give tax cuts to the young (the real wealth creators), the older members of society (i am one) had their opportunities and many blew it. At least I have many years of pension contributions and will not need to rely on trail income or trying to sell a business as an ongoing concern.

  21. I find it hard to take Rachel Reeves or the Labour party seriously on pensions. For example they are one of teh biggest critics of teh coalition government’s decision to switch indexing from RPI to CPI.

    However the Labour party scheme for support staff has also switched from RPI to CPI. Yet they refuse to answer any questions on this from members or stick to RPI as they are saynig to the general public! Hypocrisy at its finest.

  22. As long as the world keeps turning, you are never, EVER going to get an acceptable, polictically motivated, solution to any economic problem.(or any other one, come to that !)

  23. @ Kevin Archer: “This present Governments belief that rewarding the super rich will make them work harder is a myth.
    If I won a Million pounds I would STOP work and set up some trusts to minimise my personal tax, I certainly wouldn’t work harder and I won’t be employing people either.”

    => precisely! If you WON a million pounds – no hard work there then old boy!

  24. Mark at 12.54 pm.

    Public sector employees are paid entirely from the tax generated by the private sector. The tax “paid” by a public sector employee is merely giving back to the Exchequer what was passed on by the Exchequer in the first place. However, the earnings – related pension scheme contributions paid by the public sector employers typically far outweighs the “tax” that the public sector employee pays.
    The public sector employee is therefore paid for by the private sector, and the public sector employee’s employer’s contribution is also paid for by the private sector. And before you raise it, the public sector employees’ pension contribution (which they constantly whinge about) is also paid from the tax generated by the private sector.
    In the final analysis, the private sector generates the money that the public sector spends. Public sector employees appear to have great difficulty in grasping this concept.

  25. The only tax needed is purchase tax (VAT).

    It might need to be 50% or 100% – it just needs to be calculated as the percentage which will support all government spending.

    Get rid of income tax, CGT, IHT, corporation tax, stamp duty, NI – absolutely every tax other than VAT. No need for pension tax relief ! Get rid of HMRC, accountants everywhere, (Deloittes and the like would have to find something useful to do).

    VAT is a fair tax because the people who can afford to spend money will pay more tax than those that have little or no money.

    Too simple – and there are too many vested interests (earning a living from collecting tax, calculating tax liabilities, programming computers to carry out tax calculations etc etc) for such ‘blue sky’ thought to be considered.

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