This is Ritchiesque

The Guardian manages a fail on pensions tax relief:

Pensions tax relief will cost the government almost £40bn this year, up more than £2bn on the previous year, illustrating the growing cost of subsidising retirement saving.

According to new statistics from HMRC, tax relief on employee pension saving is set to rise to £21.2bn while the tax giveaway on employer contributions to occupational pension schemes hit more than £18bn.

It’s bollocks, of course it is. Because the income, when it’s a pension, is taxed. Therefore the cost of the delay – not relief – is the tax not collected at the point of saving minus the tax collected at the point of consumption of the resultant income.

And if you’re not doing the calculation that way then you’re lying.

I’m also a little bit worried about that employer break. Dunno if there are special breaks or not. Could they actually be saying that employer pensions contributions shouldn’t be regarded as a cost of being in business? Or is there a greater break than that?

And then, this being arts graduates writing about money, there’s this entire argle bargle:

But the average level of contributions fell, leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of pension contribution compared with standard-rate taxpayers who must pay 20p for every £1 of pensions saving.

Whut? What are they even trying to say? That lower rate taxpayers get a £1 pension contribution for every £0.20 they save?

22 comments on “This is Ritchiesque

  1. “But the average level of contributions fell, leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of pension contribution compared with standard-rate taxpayers who must pay 20p for every £1 of pensions saving.”

    It costs £1 for a higher rate taxpayer to put £1 into his pension pot.

    It costs £1 for a basic rate taxpayer to put £1 into his pension pot.

    The difference is in how much the government doesn’t take from you, not in how much it gives you. It gives you nothing.

    And if the Guardian is to be consistent, why not complain in the same way that a higher rate taxpaying plumber who buys a spanner is being ‘unfairly subsidised’ when compared to a basic rate taxpaying plumber? Same principle applies.

    Actually, on pensions, the only people who really get a subsidy are people who pay no tax at all. You can contribute £2,880 p.a. into a pension and then get £720 from HMG added to it even if you pay no tax at all.

  2. Have more people drifted into the 40% tax bracket, might this be the reason for the value of this “tax relief” growing?

    But the average level of contributions fell, leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of pension contribution compared with standard-rate taxpayers who must pay 20p for every £1 of pensions saving.

    Unlike the fat tuber I am not a tax expert, but I have absolutely no idea what that means.

    If the average level of contributions fell, but the amount ‘lost’ in “tax relief” rose, then either (a) many more people were making contributions, but at a lower average than before, or (b) more people have drifted into the 40% bracket, or (c) a combination of both.

    How does the whole thing work, anyway? If I am just below the 40% bracket, obviously I get tax relief at the lower rate. If my salary is £1 over the 40% bracket, do I get 40% relief on all of my contribution or just a fraction of it?

  3. I believe the employer “break” is NI related.

    If you are paid and then make pension contributions you will incur NI on your pay but only get the tax deferral on the income tax portion related to what you put into your pension.

    If your employer instead directly makes a contribution to your pension then the NI bill is lower. This is why firms offer salary-sacrifice schemes where you can have lower pay and higher pension contributions. These would be pointless admin if there wasn’t a tax/NI difference.

    The rule with pensions is anyone who says this is a tax break rather than tax deferral is either an idiot or dishonest. Either way you know to ignore them.

  4. The rule with pensions is anyone who says this is a tax break rather than tax deferral is either an idiot or dishonest.

    Or a Socialist. Oh, wait.

  5. @Rob “Unlike the fat tuber I am not a tax expert”

    Very honest of your own knowledge Rob but can I fix that sentence for you.

    “Like the fat tuber I am not a tax expert”

  6. “How does the whole thing work, anyway? If I am just below the 40% bracket, obviously I get tax relief at the lower rate. If my salary is £1 over the 40% bracket, do I get 40% relief on all of my contribution or just a fraction of it?”

    Just a fraction of it.

  7. There is a potential saving for some rather than simply a time deferral.

    Many people will get a tax “rate” saving. For example, gain tax relief on their pension contribution at 40% but then have their pension taxed later at basic rate, etc. Ie, few people actually earn more retired than when they are working.

  8. “ leaving the bulk of tax relief to be claimed by higher-rate taxpayers, who pay 60p from every £1 of pension contribution compared with standard-rate taxpayers who must pay 20p for every £1 of pensions saving”

    I think the “20p for every £1” for basic rate taxpayers should be “80p for every £1” (i.e. £1 minus 20p); he’s trying to compare the after-tax relief cost of pension contributions.

  9. “the tax giveaway on employer contributions to occupational pension schemes” – I think that’s the fact that the employee isn’t taxed on money his employer puts into his pension.

    If we scrapped tax relief on personal pension contributions, then we would also have to tax the employee on employer contributions to their pension fund (treat it as taxable income, it’s just another part of the salary).

    At which point, stand by for squeals from the public sector employees!

  10. PF said: “There is a potential saving for some rather than simply a time deferral.“

    Yes, but that’s basically averaging your income over your life, and applying the correct tax rates to that average income (or at least partially doing so), which is much more fair than whacking you with higher rate tax just because you have a few good years. If we’re going to have progressive tax rates, we ought to do more averaging, not less.

  11. There is a tax benefit in that 25% of the fund can be drawn tax free on retirement, but yes, the article is twaddle.

    Also, in my experience, those complaining of low corporation taxes are unaware of the connection between CT and income tax on dividends; lower CT leads to lower tax credits, not lower tax.

  12. …but of course, pension funds are now taxed, thanks to Gordon Brown, before they even reach the pensioner.

  13. RichardT

    I didn’t understand.

    Let me put it a different way. Including NN’s 25% freebie as well, the average % rate tax relief gained over a life time of contributions is generally likely to be well in excess of the % rate tax paid when receiving the pension over the whole period of retirement (if that helps).

    And of course, the gains (in the schemes, ie between contributions made to schemes and end values when drawing out) is all tax free as well. OK, that’s competing with ISAs etc on the other side, so maybe less of a tax difference there?

    And anything not paid out before death can end up escaping inheritance tax too..

    If doing a proper calculation, one might try to nail as many of the variables as possible?

  14. “And anything not paid out before death can end up escaping inheritance tax too.”

    True, but no doubt temporary.

    “Actually, on pensions, the only people who really get a subsidy are people who pay no tax at all. You can contribute £2,880 p.a. into a pension and then get £720 from HMG added to it even if you pay no tax at all.”

    The heartless Tory scum are still encouraging poor people to save for their old age, even though they must be well aware that Jeremy will seize it all? The swine!

  15. @PF

    I think what Richard T is referring to is the concept of a life time of income being taxed at its average level.

    To take an extreme example, someone earning £12k in each of 10 years pays no tax. Someone earning £120k in one year and £0 in each of the following 9 years will have paid nearly £39.5k in tax.

  16. I bet you the figures understate the size of the public sector “subsidy/relief”

    If you are in a final salary pension and get a pay rise to your pension of 2k / year (which could be as little as a 3k pay rise) this with current annuities be worth 100k (retirement at 60 joint life, RPI increases.)

    In fairness shouldn’t this should lead to a 40/45k tax bill?

  17. At least here in the US, there is definitely the potential to gain via marginal tax rates.

    Married filing jointly gets a tax free allowance of $25k. Next $20k is taxed at 10%. Next $60k is taxed at 12%. So gross income of $105k pays $9k tax. After that you’re into 22% marginal for next $90k.

    In most cases you’re swapping 22% marginal while working for 12% while retired. Higher earners swapping 35% for 24% etc.

    Plus, if you worked in a state that applies an income tax, but retire to a state that doesn’t, you gain.

    The problem people run into here is Required Minimum Distributions push them to higher marginal rate at 70.5

    If you’re a lower earner in a lower marginal bracket, Roth IRA are the way to go – funded after tax, gains are tax free.

    Socialists never want people to be financially independent- that’s why all the whining.

  18. Andrew C

    OK, thanks, and in which case I think my response dealt with it, from the pension angle (ie, comparative average tax rate %s for that both relieved and then later paid).

  19. Yes, but that’s basically averaging your income over your life, and applying the correct tax rates to that average income (or at least partially doing so), which is much more fair than whacking you with higher rate tax just because you have a few good years.

    A good point. That’s fair, and surely the Fat Tuber and the Guardian wants to be fair, right?

  20. @Rob “Unlike the fat tuber I am not a tax expert”
    @Andrew C Very honest of your own knowledge Rob but can I fix that sentence for you.
    “Like the fat tuber I am not a tax expert”

    I think @Rob comment was supposed to be in sarcasm script.

  21. @Nautical Nick October 11, 2019 at 12:41 pm

    +1

    Brown’s tax raid on pension schemes killed final salary pensions in private sector. Disgusting that Osborn, Hammond and Javid allow it to continue.

    BluLab – “We’ll increase tax, spend and borrow” vs RedLab – “We’ll increase more tax, spend and borrow”

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