This is what the National Audit Office had to say on the cost 0f tax reliefs, yesterday:
“HM Treasury and HMRC do not keep track of tax reliefs intended to change behaviour, or adequately report to Parliament or the public on whether tax reliefs are expensive or work as expected. We found some examples where HMRC and HM Treasury proactively monitored and evaluated tax reliefs, but in general the Departments do not test whether their aims for the reliefs are being achieved. Until they monitor the use and impact of tax reliefs, and act promptly to analyse increases in their costs, HMRC and the Treasury's administration of tax reliefs cannot be value for money.”
Amyas Morse, head of the National Audit Office, 21 November 2014
From my experience I can suggest that HM Treasury's forecasting of the cost of tax policies is poor, at best. It now seems its post implementation reviews are worse.
I could, and have, and will, suggest that many of the reliefs HMRC provide (including most for savings and almost all for supposed investments) are of almost no economic worth to the UK, whilst I have long argued that pension tax relief should be restricted to basic rate and be matched by an obligation on pension funds to invest for social benefit, but the fact is that at present HMRC and HMT don't even seem able to count the data on tax returns.
The case for an Office for Tax Responsibility - to proactively monitor such issues on a regular basis - is overwhelming.
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If you want to restrict pension relief to basic rate then you really need to restrict the tax on payments out of the pension to basic rate as well.
Otherwise the higher rate tax payer paying in 60 pounds of after tax income will have 80 pounds in his/her pension. Drawing the same funds out as a higher rate tax payer will yield only 48 pounds, which is 12 pounds less than the 60 pounds he/she started with.
I acknowledge that there should be some tax free growth in the pension and possibly a tax free lump sum, so you probably need to come up with a way of splitting the growth from the capital invested, but the idea that you need 25% growth to simply end up where you would be if you hadn’t bothered at all is going to make pension saving undesirable.
The problem with restricting payments out is that they still take up parts of the basic rate band which pushes other income into higher rate, so the problem is still there and this whole thing becomes very complicated and you probably need to come up with a scheme whereby pension income increases the size of the basic rate band.
The vast majority of pensioners do inky pay basic rate tax
But I see no reason to restrict – income is income
Income is income; and capital is capital. The point of giving any tax relief at all on contributions to a pension is to ensure that capital is only taxed once (on the way out).
By restricting the relief on the way in, you are taxing the capital more than once, which as Michael says makes pensions counter-productive. A saver would be better off with a normal savings account, which doesn’t tax capital withdrawals.
A compromise would be to allow the tax-free (or taxed only at the relief given) withdrawal from pensions of an amount equal to total contributions made. This would balance things up, but be rather complicated. It might achieve your object of preventing people deferring income such that it becomes taxed at 20% rather than 40%, though.
Tax free £30,00 more than compensates
Which tax free £30,000? Do you mean the 25%, or would you cap the 25% at £30,000?
I don’t really like the tax-free element of pensions – it perhaps works for final salary schemes, to avoid getting too high a marginal rate on a lump sum there, but it makes no sense to me in the context of money purchase. But if you’re going to say that tax on entry is justified by tax-free withdrawal, would it not be better to make some sort of closer link between the amount put in and the amount taken out? Otherwise you end up with unfairness.
I must be tired – been ion the office too long today post op
Yes 25%
And I can live with approximations
They’ll only hit higher rate taxpayers and they do not need tax incentives to save anyway
What you’d end up with is basic rate taxpayers getting 25% out tax-free, having had full relief on their contributions (so they get a net tax relief), and higher-rate taxpayers getting a tax-free amount which may or may not approximate their tax charge on contributions.
That is definitely unfair, on two counts: you’re giving more relief to some than to others, and you’re giving the others a bit of an uncertain or arbitrary result.
Now some unfairness is a good thing (no-one would argue for progressive tax otherwise!), but I’m not sure that uncertain or arbitrary results can be.
Good to know your position though 🙂
Hope you recover from the op OK.
Have you not noticed how incredibly unfair the existing system is?
richard , an office of tax responsibility is so much suited as your gig . any chance of margaret hodge putting in a word when labour takes power next year ? finally the power for you to change things !
I thought NAO’s comments were v interesting. How on earth would the Govt measure whether (e.g) Film Scheme reliefs have been worthwhile? There seems, to me, absolutely no way of knowing.
In that case why do it?
Office for Tax Responsibility way overdue. And should not be staffed by Treasury placemen, political cronies, or overburdened with Civil Servants.
Or placemen from The Big Four, especially GS!
Actually I think there should be at least some representation from the Big 4.
But at partner level so they are committed to the process.
But what happens usually when they only want to pay lip service, is that they only send along a staffer.