From the TUC

TPA concede higher rate pensions tax relief is ‘problem’

16 Sep 2009, by in Economics, Pensions & Investment

The TaxPayers’ Alliance seem to be changing their tune on pensions tax relief. When Alastair Darling announced that he was going to limit relief for those earning more than £150,000 a year, they weren’t very happy:

In one of the more mean-minded moves in his Budget, Alistair Darling has decided to claw back tax relief on pension contributions for higher-earners (those with an income over £150,000 pa) from 2011.

But now they seem to concede there is a problem, as they say that the “problem” of tax relief has been “addressed”  and “solved”.

It is perplexing to see Polly Toynbee argue that pension tax relief for the richest 1 per cent is so high relative to the cost of public sector pensions.  She should realise that tax relief for high earners has been addressed in the Finance Act this year, with relief on contributions being restricted to 20% for this group from 2011.  High earners are also restricted in the amount of the pension fund they are allowed to build up, through the Lifetime Allowance of, currently £1.75 million. Introduced in 2006, this Allowance has seen many high earners restrict, or cease, pension contributions.  So she, and the TUC, are arguing about a “problem” that has already been “solved”.

They may put some of this in quotes, but there is none of the swashbuckling defence of tax relief that drove their earlier post.

But they still don’t get it. Our concern is not so much with pensions tax relief in itself  it is the way that very well off people abuse reliefs to avoid paying a fair share of tax.

The changes in the tax treatment  of top pensions is welcome, but there is already much evidence that top directors have cut the amount that they take in pension or are doing so offshore. As the Guardian reported yesterday:

Company directors switched millions of pounds worth of pension contributions into cash last year to avoid a government clampdown on tax relief for wealthy pension savers, according to the Guardian’s survey of directors’ pensions.

Pension experts said most directors asked for cash instead of a pension to dodge a cut in tax relief affecting people with pension pots worth more than £1.75m. The 50p-in-the-£1 tax rate was implemented in 2006 on pots worth more than £1.75m, prompting executives to rely less on their occupational schemes and more on individual savings plans.

The tax changes have also had an impact on the clarity of company reporting on directors’ pensions – senior members of FTSE 100 boardrooms include only a fraction of their retirement savings in their annual accounts. The move effectively takes their pensions out of sight and sometimes offshore away from the prying eyes of shareholders, the UK tax authorities and other stakeholders.

The TUC’s own PensionsWatch (pdf) confirmed this. We found that many directors were receiving explicit “compensation” for changes in tax rules, with an average payment of more than £100,000 a year.

There is a rationale for tax relief on pensions as I set out here and here. And of course, a tax incentive to save will provide more help if you choose to save two pounds rather than one pound.

But there must come a point on the income scale where tax relief on pensions is no longer acting as an incentive to save more, but simply being used as a tax avoidance device.

That is why the TUC has talked of a minimum tax rate for earnings above, say, £100,000. This would limit the amount of relief that could be claimed by insisting that everyone earning above this figure pay a minimum proportion of all their income as tax. While we suggested this should start at 32 per cent for earnings between £100,000 and £150,000, the figure is less important than the principle.

The TaxPayers’ Alliance are the kind of people who support flat taxes. You can think of minimum tax rates as a kind of graduated and progressive flat tax for the rich. It would simplify the tax system and reduce tax avoidance. But the trouble with the TaxPayers’ Alliance and their secretive backers is that they are not on the side of ordinary tax payers, but the rich.

But after their retreat on pensions tax relief, who knows what further U-turns are to come?