I published this video on TikTok this morning.
As I noted on Twitter:
Why does the average higher rate tax payer get more subsidy for their pension savings each year than anyone on Universal Credit is paid and many old age pensioners get per annum? What is the sense in that? And where is the fairness?
The transcript is as follows:
People who are wealthy in the UK get benefits of, on average, at least £8, 000 a year. Why is that? And why is that fair?
Now let's be clear what I'm talking about. The benefits that the wealthiest people in the UK get on average, and I stress that ‘on average' point, relate to the pension contributions that they make to their pension funds every year.
The total cost of the tax subsidy to those who are wealthy in terms of the pension contributions that they make amounts to at least £38 billion a year. At the time that I was doing the data and in the year that that information relates to, there were around 4. 4 million higher rate taxpayers - there are more now, but the data on tax relief costs will have gone up as well - that's an average of over £8,000 pounds a year for each and every one of them.
Now, of course, some of them don't pay anything into a pension and some of them pay a great deal more than average into a pension. But we're still in the situation that they get benefits of more than £8,000 a year each on average.
Compare that to a person who's on the old estate pension scheme. This year, they're going to get around £8,800 a year in pension.
Compare that to a person who's on the new state pension scheme, which applies to younger state pensioners. They get £11, 500 a year.
Compare it also to a person who's on Universal Credit. A single person who's on Universal Credit and is over the age of 25; they get around £4,800 a year.
So why are we giving such an enormous amount of money to the wealthy to subsidise their pensions when there are people who are living in poverty in the UK who have such small amounts to live on?
It makes literally no sense at all. So, I've made a straightforward recommendation in the Taxing Wealth Report, and that is that the tax relief on the contributions that the wealthy make to their pensions should be reduced to the basic rate of tax. At present, they get that tax relief at either the 40 percent tax rate or even the 45 percent tax rate if they are earning over £125,000 a year.
If we reduce that to the 20 percent tax rate, which the 85 plus percent people in the UK pay in terms of income tax, then we would save £12. 5 billion a year of the cost of subsidising the savings of the wealthy. And that will be enough to give every single old age pensioner in this country an extra £1,000 of income a year.
Now, which is better? That we subsidise the wealthy, or we give those who are in need a bigger pension? I think the answer is glaringly obvious. It's even obvious for the economy as a whole. Because those pensioners would spend that money and give a massive boost to the economy, literally lift growth, and deliver a better outcome for everybody in society, including the wealthy, because we'd all be better off because of their spending.
This current structure of giving subsidies, benefits if you like, to the wealthy for their pensions does not make sense. We have to create a fairer, better and more honest and accountable system where people know just how skewed our society's system of benefits is towards those with wealth. It's unfair. It has to end. And I'm suggesting to you that you should be asking your politicians about how they will deliver better outcomes for us all.
There is more on this in the Taxing Wealth Report 2024, here.
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I think you need to disambiguate between wealth and income. I’m a higher rate tax payer who started with nothing and have worked my way up the corporate ladder to a point where I’m comfortable but not, by any means, wealthy. I have no inheritence coming my way or any other ability to build some sort of cushion for myself other than diverting some extra money towards my pension when i’m able to. What you’re suggesting punishes workers like myself striving upwards and diminishes my incentive to work harder given how much of my income goes towards tax already. Tax wealth, not income.
You have high income
You are in that case under taxed compared to those on lower income
Why are you worth more in subsidies for your savings per annum than those less well off have to live off?
Might you also explain why you might work less if you lost a part of this subsidy? How what that be apparent when, no doubt, you are salaried, and how do you think your employer would react? Come to that, why would your family want you to penalise them in this way? Please tell.
No matter how you phrase it, what Richard is proposing is effectively another tax rise.Half of all income tax in this country is paid by the top 5% of earners. My marginal tax rate is high enough that I have no incentive to 1) get promoted : because the extra say 15 hours a week I would need to work are not worth it 2) switch jobs because the bump is also not worth it.
I have a skillset that is valuable on a global market. My employer is not only competing against UK employers for my skillset but with other companies globally. If my taxes keep rising in line with what Richard is suggested, I will not just simply not work harder, I will just leave the UK entirely and go somewhere where I can get rewarded appropriately.
I have worked way too hard to get myself out of poverty to not do the best I can for myself and my family. There are many people in this country with wealth and comparatively low incomes who don’t get taxed nearly enough for the wealth they have. The same wealth that I won’t be able to attain if you tax me more. Think about what that means for social mobility. If that’s the case I would tell any talented young people from a poor background to just leave this country if they ever want to get any form of prosperity.
If you had to do another 15 hours a week unpaid to get promoted the problem is not tax. It is:
A) You’re not talented enough to be promoted, or
B) You’re working for a totally shot employer
If you can’t work that out I suspect the answer is (A)
Which suggests you won’t ;eave the UK – because you are not nearly as valuable as you think. And few people actually do that – because their families do not want them to.
And if you had not noticed:
1) I am leaving you with masses of tax relief
2) I am proposing that wealth be taxed
Meanwhile, if the young can’[t get wealthy (and you admit you are by making the claim you do) then what you;re really saying is that our economy has failed – not our tax system has
However you look at it I come back to my conclusion (A) again. These are lousy arguments
In what way is Tax Relief at 20% a “punishment”?
Hi Colin
” I have no inheritence coming my way or any other ability to build some sort of cushion for myself other than diverting some extra money towards my pension when i’m able to”
As a higher rate tax payer, you will be bringing home at least £3000 every month (based on higher rate threshold). That’s nearly double what a minimum wage earner would bring home, and who would be expected to save for their old age too.
If you are not always able to put the extra money towards your pension, I suggest you may be in need of an accountant to assist in your financial planning.
Regards
Colin, you say “Tax wealth not income”.
But Richard is not talking about taxing income. He’s talking about not giving a tax benefit to high earners (or, as I have previously described it, not giving them a “bung”).
There’s a huge difference between not giving an unjustified tax benefit and imposing a tax.
Excuse me for saying, but it sounds just a tad entitled to think that you should pay a lower rate of tax than those who earn less.
“Excuse me for saying, but it sounds just a tad entitled to think that you should pay a lower rate of tax than those who earn less”
Even with this “bung”, where in the UK do high earners pay a lower rate of income tax than those who earn less? And I’m not talking about people like Rishi with wealth which doesn’t get taxed at that higher rate. I’d would be happy to pay the same rate as those who earn less if such a thing existed. We already pay the bulk of the income tax in this country. I’m just saying stop punishing us more.
And as for the ‘we pay more income tax trope’ might that be because the wages of the best off are the only ones to increase in the UK over a very long time? I think you will find it is. So stop the silly claims: they really are very unbecoming.
Please go and read the Taxing Wealth Report where I set out the evidence
Unlike you, who cannot even use your own name, I do not make unsubstantiated claims
I agree with you, Mr. Murphy, regarding restricting pension contribution tax relief to the 20% basic rate of Income Tax, even though I have many clients who benefit from the 40% or 45% relief available.
I would go further, too. I know lots of people who have large Defined Contribution pension pots that will never be needed to provide a pension. Instead, what with pensions being subject to trust law, they just treat them as Inheritance Tax mitigation schemes. As you will appreciate, substantial sums can be passed tax-free in many circumstances outside of one’s estate – only the rich tend to benefit from this. I don’t, however, have a problem with pension pots being inherited, I just don’t think that this should be tax-exempt. After all, a ‘widows’ pension from a Defined Benefit scheme is taxable, so why the difference?
The really rich, or at least those who qualify, can always fork out for a large life insurance policy in trust to ‘pre-fund’ the potential IHT liability – few do as they treat their private pensions as life insurance.
Call me old-fashioned, but a pension pot should eventually provide a pension, taxed under PAYE. Probably from that old insurance contract, the Lifetime Annuity!
I have put forward a proposal to tackle this issue in the Taxing Wealth Report in the inheritance tax section
I think there is an argument that if tax relief is restricted to basic rate then the tax paid on income drawn from the pension should be limited to basic rate and not push other income into higher rate taxes either.
In very simple terms imagine you receive £1,000 of income through employment and pay 40% tax on it, you get £600, you put that £600 into a pension and get £200 of tax relief so £800 goes into the pension. If you are a 40% taxpayer as a pensioner or have other income that £800 coming out of the pension would give you just another £480 after tax.
Really there are two choices, either keep the money outside a pension today and hold onto £600, or put it through your pension and get £480 later. Why would you even consider using a pension?
I know that there is a lot more complexity than this including whether pensioners tend to be higher rate tax payers, 25% lump sums and the roll up of tax free growth, but the outcome is very complicated. It would make a pension a very unattractive proposition for higher rate taxpayers though.
Why?
You are ignoring:
– 25% tax free withdrawal
– NI relief on going in
Your argument is still for a bias to those with high income, which cannot be justified by the rest of the system
So, why do that?
Michael, you forget that you get compounded growth putting your 600 into a pension. The point is that at the moment, a higher rate tax payer gets an immediate extra 20 or 25% compared to a basic rate tax payer, added into the pension pot to get compounded over the years before accessing the pot. How is that fair?
You also have a choice when you reach pension age, or how much income you take. You are not forced to take so much income that your pension is also in the higher rate tax brackets!
Richard,
As you have rightly pointed out there are very few pensioners who pay higher rate tax so there seems to be no reason to allow higher rate relief on contributions
Attacking the person says all I need to know about your argument Richard. Thank you and good luck with your activism.
Colin
If you think I attacked you, think about how all those who you demand live in poverty might feel about your demand that they subsidise you.
I’d try learning about empathy if I was you.
Go well
Richard
I would say many of those living in your definition of “poverty” choose not to work and instead live off benefits. How on earth are they subsidising anyone?
Are you in the slightest bit aware of how amazingly hard it is to claim benefits and how little by value are paid?
“Are you in the slightest bit aware of how amazingly hard it is to claim benefits and how little by value are paid?”
In August 2023, 22.6 million people were claiming some form of benefits, in England, Scotland and Wales.
It can’t be that difficult..
That includes all pensioners and child benefit payments
Liek the average troll you really do not have a clue what you are talking about but use it for the purposes of abuse anyway
I will wager next month’s salary that “nathan” strongly believes in the following mutually contradictory propositions:
The government should run a budget surplus and reduce the national debt
People should take personal responsibility and save for their own and their families future needs
The balance of payments is immaterial and we should import low cost goods via laissez faire rather than protecting or even favouring UK industry / services
Or in other words macro-economic illiteracy writ large
I suspect so too
It feels like some folks reading this blog think that pension tax relief is a human right. It is not.
People earn money and pay the appropriate amount of tax. They may choose to save some of their earnings into a pension – but they don’t have to. No one forces anyone to save for a pension.
One reason they may choose to save this way is because the government offers tax relief to encourage them to do so. The government doesn’t want to have to pay extra benefits because someone hasn’t saved for a pension. But, beyond a certain point, that argument no longer applies because high earners will have an adequate private pension. They may want more, and they can save for it. But there is no reason for the government to encourage them to do so, especially not at the expense of the less well off.
Then when someone takes a pension they should, again pay the appropriate rate of taxation be it 20% or 40% . Tax on pension payments is in no way linked to tax relief to encourage pension savings.
I hope no one tries to argue about “double” taxation. All money is taxed multiple times until it is reclaimed and cancelled by the government.
So I’m saying that people can save for a pension if they choose, and if they can afford to. Or they can choose not to save it’s up to them. The government may encourage this through tax relief. But there is no reason to encourage higher earners more than lower earners.