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Pension Tax Relief For Higher Earners

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People are repeating fundamentally dishonest claims made by Labour and, to a lesser extent, the Lib Dems. So let's set out the facts about how higher rate earners' pensions are taxed, including the so-called "generous reliefs."

- Very simply, a higher earner does not pay tax on earnings which go into his pension scheme. He only pays tax when the earnings come out. There are various caps on how much he can put into his pension each year and in total.

- The Labour/ Lib Dem claim is that this constitutes an overly generous relief. Nonsense. It's just a policy of only taxing pension income on the way out of the pension, rather than on the way in. In other words, you don't get taxed on your pension income till you actually get your hands on it. I don't see anything especially over-generous about that.

- Limiting tax "relief" on pension contributions made by higher earners to their pension scheme would mean that they have to pay tax twice on the same income. Once when it goes into the pension, and again when it comes out. This is clearly unfair, and the Labour claim that clamping down on pension contributions for higher earners is "the right thing to do" is very dishonest.

- They've already introduced double taxation for people on incomes of more than 150k. Let's hope it doesn't come in for all higher rate taxpayers.

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Another way of looking at it might be to compare a higher/lower rate taxed person. And I have no idea what I'm talking about here as I don't really understand it (I have no pension), but doesn't it go like this:

A lower rate tax payer, paying £1000/year into their pension, would have a pension pot of £1200.

A higher rate tax payer, paying £1000/year into their pension, would have a pension pot of £1400.

So, ignoring growth etc entirely, after 50 years they'd each have:

Lower: 50x£1200 = £60,000

Higher: 50x£1400 = £70,000

If we assume the actual amount doubles every 25 years (making this bit up as you can see), they'd end up with:

Lower: £240,000

Higher: £280,000

So how's that fair then? That the higher earner earnt more their entire life, gave up as much as the lower paid person (for whom it was a struggle to raise that much) and yet they ended up with more in the pot?

Now, as I said, I made the figures all up and don't understand how it works .... but it's just always seemed 'unfair' to me that higher earners could put in all of their salary over the threshold and get the 40% benefit on it all.... and will always end up with a bigger pot than the lower paid person.

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A lower rate tax payer, paying £1000/year into their pension, would have a pension pot of £1200.

A higher rate tax payer, paying £1000/year into their pension, would have a pension pot of £2400.

Not true. They both have £1200 in their pension, the latter may have claimed back an extra 20% if he filled in a tax return - but it won't be in his pension pot.

The question is "will both be taxed the same when the money comes out of the pension?"

i.e. does the higher rate tax payer get taxed at 40% but the lower rate tax payer only get taxed at 20% when both have the same size pension pot?

My understanding (might be wrong) is that the the rate of tax paid will be the same if they have the same size pension pot / income from their pension.

I think the idea was that those paying 40% tax while working are likely to pay 40% tax when they retire and that those paying 20% while working are likely to only pay 20% when they retire. Problem is, a lower rate tax payer might be really frugal, save loads and endup pqying 40% on his pension income when he only got 20% tax relief on his contributions which shows the problem with having different income tax bands.

There surely should be only one income tax band for all to avoid these problems and the red tape required to manage their complexity - maybe have a decent tax free allowance to stop the one tax band being too low, say 30% on everything over 25k? No need for tax credits then either.

I understand your sentiment about the better off having more opportunity due to greater wealth but it's like saying "it's not fair, he's got a better job than me..."

You either accept life isn't fair and shut up or do something about it - the alternative is communism.

Edited by ader

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People are repeating fundamentally dishonest claims made by Labour and, to a lesser extent, the Lib Dems. So let's set out the facts about how higher rate earners' pensions are taxed, including the so-called "generous reliefs."

- Very simply, a higher earner does not pay tax on earnings which go into his pension scheme. He only pays tax when the earnings come out. There are various caps on how much he can put into his pension each year and in total.

- The Labour/ Lib Dem claim is that this constitutes an overly generous relief. Nonsense. It's just a policy of only taxing pension income on the way out of the pension, rather than on the way in. In other words, you don't get taxed on your pension income till you actually get your hands on it. I don't see anything especially over-generous about that.

- Limiting tax "relief" on pension contributions made by higher earners to their pension scheme would mean that they have to pay tax twice on the same income. Once when it goes into the pension, and again when it comes out. This is clearly unfair, and the Labour claim that clamping down on pension contributions for higher earners is "the right thing to do" is very dishonest.

- They've already introduced double taxation for people on incomes of more than 150k. Let's hope it doesn't come in for all higher rate taxpayers.

They pay tax on the way out if they remain in UK of course. There are better and sunnier place around and with good amount of money, they probably won't be around to pay tax.

Quite a few tax conference nowadays as well 'advising' wealth boomer what their options (in the sun) are. (like Cyprus).

Probably a flat rate 20% relief (As opposed to20/40/50%) would be easier to implement.

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I thought it best to also point out the other scenario.

A higher rate tax payer can (I u derstand) currently pay in £1k get it increased by the govt. to £1.2k and get the £.2k tax rebate (if they fill the forms in) but never save enough of a pension to get taxed at 40% - so that is a benefit to higher rate tax payers, but it's really no different to a lower rate tax payer paying in so little they pay zero tax on their pension.

Lastly, a 40% tax payer could pay in so little they get zero tax at the end too, but get their contributions upped when they pay it in and get the rebate too.

Not sure these "benefits" are big enough as to be worth raving about though...

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Probably a flat rate 20% relief (As opposed to20/40/50%) would be easier to implement.

They should just abolish any relief and any taxation on pension income.

Would save us (as a country) money now - (we probably need it more now than we will in the future).

Just allow any pension contributions to be made before tax and with no income tax when drawn down (but make sure they can't avoid it by as you suggest moving abroad) - they should be encouraging us to save for our pensions!

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They should just abolish any relief and any taxation on pension income.

That's called an ISA.

Just allow any pension contributions to be made before tax

That's how it works in a company pension scheme. Except of course the money gets taxed when you draw the pension.

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There is a very easy way around this and i is called a salaray sacrifce. basically the company pays you less and pays that amount direct into a pension fund for you.

So the money is untaxed, the company can also add to it the Ni they and you haver saved adding another 13.8% to the contribtion.

All accetable to the Revenue so I have no idea why they are making such a fuss about it.

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Now, as I said, I made the figures all up and don't understand how it works .... but it's just always seemed 'unfair' to me that higher earners could put in all of their salary over the threshold and get the 40% benefit on it all.... and will always end up with a bigger pot than the lower paid person.

They are not getting more benefit, until they apply for the relief on the payment they are paying tax on their pension payments which they shouldn't, the rebate just takes it back to the same level playing field in that no tax is paid on pension contributions otherwise they would be taxed on the way in and the way out, now that is hardly 'fair' is it? If the money was paid pre tax which I think it should there wouldn't even be a relief and noone would take notice, unfortunately certain sorts just see someone else 'getting' something and cry unfair without understanding the situation.

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the concept of pensions is false anyway. Work hard all your life and have a rest at 65 are you kidding me.

If you do that by the time your 65 youll be a money grabbing dullard. Every time that subject comes up in the pub people say oooh i dont think ill ever be able to retire what a load of bull.

The few people I know off that can put 100k a year into the pension pot work 359 days a week, cancel holidays for work, and have hours that spans into 24hrs regularly. One has had multi heart attacks, the other feels so ill most of the time, never noticed they had cancer, found out just in time!

After houses, pensions are a great plough for the horses back whatever the tax bracket.

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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