Pensions tax relief: Will simple work?
Perhaps one day it will come to be seen as the last gasp of the UK’s outmoded and overly complex approach to tax law, but coinesseurs will be keeping their eyes open for clauses in the Finance Bill 2011 repealing provisions in the Finance Act 2010 (April) to restrict tax relief on pensions, before they actually come into effect.
AccountingWEB.co.uk Tax Editor Rebecca Benneyworth was one of many commentators to complain about the technical flaws in this this ill-fated legislation that included a tapering reduction in relief that meant those earning between £100,000-£113,000 would have experienced a marginal tax rate of 60% as their personal allowances were reduced by 50p for every extra pound they earned.
“It had some major technical flaws associated with it,” said Benneyworth. “And let's not forget that it is the reason that we have had the hated ‘special annual allowance charge’ for both the last and the current tax year.”
After promptings from the likes of Benneyworth, CIOT tax policy director John Whiting (now director of the Office of Tax Simplification) and Grant Thornton's head of tax Francesca Lagerberg, the new government has embraced the simple idea of restricting the annual limit for pensions relief from £255,000 to somewhere around £35,000-£40,000.
“Although such a move would not specifically target the relief given to higher rate and additional rate taxpayers, reducing the amount which an individual can contribute to a pension tax free across the board seems like a childishly simple and effective way of reducing the tax cost of pension contributions,” said Benneyworth.
But a 27-page HMRC/Treasury consultation document (353kb PDF) published this week indicates that in the world of tax, nothing is quite that simple.
Also see AccountingWEB.co.uk's summary of the seven other consultations issued this week, ranging from furnished holiday letting rules to PAYE reforms and UK/foreign owned company rules.
Continued...
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what about employer contributions?
An important element of any pensions reform should heavily restrict the deductibility of excessive contributions by employers.
Goodwinesque payments into pension funds as part of the greasy grubby deals done by self-servicing boards of plc directors when they bin one of their own to appease baying journalists should not be deductible against their profits,
and they should also above a certain defined limit be taxable as ordinary full PAYE liable income on the recipient. For example preventing anything above £100,000 pa of payments would only touch a tiny number of (already very rich) individuals.
It never ceases to amaze me that among my contacts the correlation between rich individuals being the MOST fascinated by tax-evasion is so strong. Lower paid people accept their tax lot with little complaining.
do we want people to contribute to Pension Arrangements or not?
This is the sole question. If you are saying to higher earners no thanks. Then they will either not contribute or contribute to schemes that will bring in less tax in years to come when they decide to quit working.
I then ask the question how much tax relief are we talking about? If we dumped all the regulations how many civil servants would no longer be required to administer it.
So it is back to simplicity. How about a a percentage of earnings say £10,000 or 20% (which ever higher) and if not used in one year then carried forward to the next etc. This contribution figure would cover employer and employee contributions and MPs.