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Numbers game


DPB Independent Financial Services, Edgware, Middlesex

Vincent Cable thinks that higher-rate tax relief on pension contributions is “a direct subsidy to higher earners”. I have never heard the ability to keep for oneself some of your own earnings on the condition that it is put away in a fund (itself of value to the country as against spending it on holiday in Italy) described before as a subsidy.

A subsidy is something that one is given, not an element of earnings that one is allowed to keep, albeit restricted in its use. Cable wants such tax relief to be restricted to 22 per cent. Graciously, he is to “consult with the industry on how this would effect defined-contribution schemes”.

Given that the cost of provision of pension schemes by a company is an allowable business expense, any reduction in tax relief to companies on such contributions would go to increase cost and hence be another determinant against such provision. Whether defined-contribution or defined-benefit is surely not what this now greatly underpensioned country needs.

Cable cannot really be suggesting that companies should get a tiered tax relief on pension contributions – full for the 22 per cent PAYE minions, restricted for the 40 per cent taxpaying fat cats. So those working as a PAYE employee would be safe from his suggestion, as even the lunatic fringe in the LibDems could see (I hope) that the above would be unworkable.

So, who would lose the tax relief at the higher rates? Not the higher-paid execs who might now contribute, in addition to their occupational scheme, personally to a Sipp as an alternative to their “exempt-approved” (I know, regulated pension) scheme or increase of AVC contributions by way of salary sacrifice.

The ability of a company to contribute an amount to pensions at up to 215,000 per individual (I know it has to be commercial) will overcome that problem, whether company scheme or Sipp. So, who does his proposal leave in the firing line? Why, in reality, the self-employed – that sector of the workforce already hammered by the Treasury, which in reality makes this country tick and on which, by the very nature of small or one-man businesses, red tape falls most heavily.

An article in Money Marketing said recently that the self-employed are the most under-provisioned sectors of society. Does Cable want this to worsen or doesn’t he care? Perhaps he does not realise the ridiculously low level at which 40 per cent tax kicks in. Taxable income over 33,300 is taxed at 40 per cent. Add to this the personal allowance for 2006/2007 of 5,035 and anyone with an income of more than 38,335 will pay some tax at 40 per cent. “High earners”?

l Tax on 38,335 is 7,068.

l NI at this level as an employee is about 3,235.

l NI as a self-employed inc. class four is about 2,380.

However, the employee gets the state second pension, the self-employed do not. Average S2P rebate to an appropriate personal pension at this salary level about 1,500. As the Yanks say, go figure. Who gets the better deal?

No one, not even Dr Cable, could claim that anyone on 38,335 who has his take-home reduced by about 10,000 by tax and NI is a “higher earner”. Perhaps Dr. Cable means really high earner – those earning over of 100,000 such as judges. They have already been exempted from the lifetime allowance. Surely with pension simplification, Mr Brown has limited the overall tax relief that can be claimed in a working lifetime by the 1.5m allowance, indexed but which will eventually be eroded by time and inflation to a trivial amount, as has happened to the P11d for those higher paid at 8,500.

The problem with politicians was encapsulated by Harold Wilson’s “A week is a long time in politics”. It is less than 30 years ago when the top rate of tax – on relatively modest income – was 98 per cent and GB Ltd had a drain of both brains and cash as the professional and entrepreneurial classes emigrated.

Current economic theory is moving to a flat-rate tax, with little or no exceptions but a higher threshold. Should that happen, then Dr. Cable’s proposal will be redundant. Until it happens, might I suggest that Dr. Cable allows the risk-takers and the wealth producers of the country to set aside for the long- term some of their earnings, without the state increasing the size of its shovel.

We should expect more sense from a formal special professor with a doctorate in economics and a very wide economics background.

He is just 63. He was elected to Parliament in 1997. If he retires at age 65 in May 2008, he will have had about 11 years membership of the Parliamentary pension scheme. It is, or course, defined benefit with a 40ths accrual rate. Members contribute at 10 per cent of salary and so automatically get higher-rate tax relief. As an MP’s basic salary will shortly be 60,277, they all probably pay higher-rate tax. The open market cost of an 11/40ths of salary of 60,227 with 50 per cent spouse’s pension is 16,562 a year RPI indexed for a 65-year-old, is about 413,000.

No wonder he does not want higher-rate tax relief on his own contributions. He has got the bargain of a lifetime for something less than 66,000 of personal contributions before tax relief.

W Jacklin
Carr IFA


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