I\’m not all that sure that I follow the logic here.
Many businessmen chose to take their pay package in two parts, with a relatively modest slice as income and the bulk going into their pension pot. This has been a popular, and legitimate way for people to reduce their tax liabilities, as well as a useful tool to encourage people to save for retirement. That is because the pension contributions, up to a maximum of £245,000 a year are entirely free from tax.
However, from 2011, the Treasury will, in effect, tax these contributions at a rate of 20 per cent for anyone earning over £150,000 a year.
Tax relief on pension contributions is limited to the basic rate of tax, yes, I get that.
But such tax relief hasn\’t been, at least I don\’t think it has been, a pure tax relief, has it? You don\’t get off scott free. Sure, you get to invest the money and save it without having paid tax. But when it comes time to take your pension you pay tax on the income you receive then, don\’t you?
So now these people will pay 20% income tax on the money they put into their pension….and standard income tax rates when they take the pension out again. And at the new 50% marginal rate….wait a minute, at the new 50% marginal rate it won\’t be taxed at 20%, will it? It\’ll be taxed at 30% (50% minus the 20% basic rate)….so they\’ll be facing a total of 80% marginal tax rate.
That\’s gotta hurt.
And we will no doubt see changes in behaviour at those sorts of tax rates, won\’t we?