Mark Wadsworth

This is a spare 'blog in case my main 'blog at markwadsworth.blogspot.com isn't working

If you’re going to reform pensions, why not go the whole hog?

From The Daily Telegraph*:

Discussions have begun at the Treasury over the move which would see the axing of tax relief currently paid out on pension contributions by people who pay income tax at the higher rates of 40 per cent and 50 per cent. The money saved could go towards cutting the budget deficit or – in what would be a more politically popular decision – be used to provide a significant increase to the value of the basic state pension…

Some Conservative MPs expect the axing of higher-rate relief to be merely the first stage in a more extensive and radical plan which would end up with all tax relief – including on contributions made by people paying the basic 20p rate of income tax – being abolished, saving £22 billion a year in total. Such raids, which could be announced in next year’s Budget, would be greeted with howls of protest by the pensions industry.

However, experts estimate that abolition of all tax relief on pension contributions – except employer rebates which would be likely to be retained – could be used to boost the value of the basic state pension by up to half.

OK, how about this for a plan?

It’s not £22 billion, for a start. HMRC’s Table 1.5 gives the total cost of income tax relief for pensions contributions and tax exemptions for pension funds as £20.3 billion and relief from Employer’s NIC as £7.9 billion. Contracted-out rebates cost £9.5 billion. There’s no figure for the ‘cost’ of relief from Employee’s NIC, so let’s guess another £6 billion for that, total £43.7 billion.

Let’s then split that £43.7 billion into four chunks of £11 billion and see what we could do:

a) Increase the proposed Citizen’s Pension by £20 a week.

b) Reduce Employer’s NIC’s from 12.8% of wages to 10%. Even better, scrap the lower threshold and apply a flat rate of 7% or 8% to all wages.

c) HMRC’s Table 1.6 tells us that getting rid of the 50% additional rate tax would cost £0.7 billion, and reducing higher rate tax from 40% to 20% (i.e. scrapping higher rate tax) would cost £12.6 billion, but let’s factor in some Laffer effects and call it £11 billion as well.

d) Increase the income-tax personal allowance and Employee’s NIC threshold by £1,500 a year.

What can possibly go wrong?

* Spotter’s Badge MBK.

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