Higher rate tax relief: Pension planning gets political.

20th November 2012

The Conservatives and Liberal Democrats have staked out very different versions of what ‘we are all in this together means’ and it could have a big impact on your finances.

The Conservatives want to see more welfare cuts, perhaps as much as £10bn a year by 2015-16, on top of already big welfare cuts as the fragile recovery means that the budget deficit remains stubbornly high. The Lib Dems, increasingly under fire from their backbenches on the issue, say broadly that they will only agree to welfare cuts if the rich pay more too.

The junior coalition party’s ideas revolve around some sort of wealth tax. But you have to watch what labels are being applied to what initiatives. Until recently the Liberals wanted some sort of mansion tax where an additional tax might be levied on big properties. The most recent proposed method for applying this was to adjust the council tax system, increasing the amount taken from the highest bands or more likely adding more top bands to the existing ones. Whether this meant the wealth tax had metamorphosed into higher council tax may be academic, because a mansion tax in any guise would be deeply unpopular among the better off.

This week, however, it looks like the new means of levying a ‘wealth’ tax, might be by cutting higher rate tax relief on pensions. This had already become less generous in the last few years. In George Osborne’s first ‘emergency’ budget in 2010 he reduced the maximum annual amount that could attract pension tax relief to £50,000 a year from £255,000 although it wasn’t quite as swingeing a reduction as it appeared on first reading, because you could ‘carry back’ unused tax relief from three previous years.   Osborne’s move was effectively a simplification of a previous Labour Government clampdown.

Now today’s (November 20) Financial Times says it is possible that the threshold could be cut to £40,000 raising £600m or £30,000 raising £1.8bn for the Exchequer. The move was first tipped at least in the run-up to this particular Autumn Statement by the Telegraph Group’s head of personal finance Ian Cowie a week previously.

Any move on pension tax relief would be resisted by some Conservative backbenchers who are likely to argue that it will penalise savers and could hurt core Conservative voters. But the detail of the arguments are quite complex.

The eventual income from the pension will be subject to tax, so supporters say it is merely deferred taxation. However a good pension adviser should help you maximise the relief and minimise the tax you pay eventually. The pension industry traditionally argues that changing the relief risks alienating top directors from the pension system, just when their support is needed to get everyone saving under a new pension reform known as auto-enrolment.

Poverty campaigners, trade unions and even leading Lib Dem backbenchers will say that such arguments are mostly theoretical and that the practical impact of Government policies are that the rich are not paying their share while the poor, who are least able to afford it, are hardest hit. They know that welfare cuts are quite popular but many existing changes including those surrounding disabilty are yet to bite, so the mood could shift. 

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