Pension Tax Relief Query
Discussion
Evening all,
Lots of discussion in the news recently about the potential changes to pension tax relief in the next budget. I'm a high rate tax payer and take advantage of the tax relief available to add to my pension pot each month. My employer also makes contributions to my pot.
I pay into 2 separate employer pension schemes directly from my monthly pay. Both schemes are DC and not DB. These are NOT salary sacrifice schemes, however the contributions are taken directly from my salary without getting taxed and without having to claim tax back from HMRC. I understand that these schemes are called net pay arrangements based on the following extract from the Pension Advisory Service website.
Workplace pension schemes
There are three different ways that you may receive tax relief on your contributions.
1. Your employer deducts your contributions from your pay before they deduct tax from your pay. This means that you receive tax relief at the highest rate of tax that you pay. This is called a net pay arrangement. You can find out if you’re in one of these schemes by looking at the scheme booklet or asking the scheme administrator
So, my question is:-
If the Government reduces pension tax relief from 40% to 20% does that mean I will pay 20% tax on all pensions contributions above the higher rate threshold?
Also will the contributions from my employer to my pension pot also be subject to 20% tax?
I'm trying to calculate the likely impact on my pensions savings in the Goverbnment do indeed reduce the tax relief for higher rate tax payers from 40% to 20%. It's actually worse for me as I'm based in Scotland and our higher rate is 41% and we pay both 41% AND 12% NI between the UK and Scottish high rate tax threholds - An effective tax rate of 53% on around £6500 of earned salary!!
Thanks in advance.
Lots of discussion in the news recently about the potential changes to pension tax relief in the next budget. I'm a high rate tax payer and take advantage of the tax relief available to add to my pension pot each month. My employer also makes contributions to my pot.
I pay into 2 separate employer pension schemes directly from my monthly pay. Both schemes are DC and not DB. These are NOT salary sacrifice schemes, however the contributions are taken directly from my salary without getting taxed and without having to claim tax back from HMRC. I understand that these schemes are called net pay arrangements based on the following extract from the Pension Advisory Service website.
Workplace pension schemes
There are three different ways that you may receive tax relief on your contributions.
1. Your employer deducts your contributions from your pay before they deduct tax from your pay. This means that you receive tax relief at the highest rate of tax that you pay. This is called a net pay arrangement. You can find out if you’re in one of these schemes by looking at the scheme booklet or asking the scheme administrator
So, my question is:-
If the Government reduces pension tax relief from 40% to 20% does that mean I will pay 20% tax on all pensions contributions above the higher rate threshold?
Also will the contributions from my employer to my pension pot also be subject to 20% tax?
I'm trying to calculate the likely impact on my pensions savings in the Goverbnment do indeed reduce the tax relief for higher rate tax payers from 40% to 20%. It's actually worse for me as I'm based in Scotland and our higher rate is 41% and we pay both 41% AND 12% NI between the UK and Scottish high rate tax threholds - An effective tax rate of 53% on around £6500 of earned salary!!
Thanks in advance.
Edited by Ecosseven on Sunday 9th February 18:33
Edited by Ecosseven on Sunday 9th February 19:48
The same articles have popped up every year pre budget for the last 10-20yrs and nothing ever happens.
20% flat relief would do no one any good. Majority of pension schemes use a salary sacrifice arrangement (most tax efficient way) so the minimum relief on offer is currently 32% (20% tax, 12% NI)
Creating a flat rate at 20% would hit millions of basic rate taxpayers who are currently getting 32% relief. Higher rate taxpayers benefit from 42% relief so not all that much different.
Then there’s the question of double taxation. Taxed on the way in, taxed on withdrawal.
For Scotland, some of us are paying 53% taxation due to the £43,400 - £50,000 band. If for example the government created a flat rate at 20%, it would cost you 33% just to put that money into your scheme (If you fell within that 53% band). You would then get taxed at a minimum of 19/20/21% on withdrawal but possibly as high as 53% on the way out. (Again depending on the withdrawal rate) 33% tax on way in and 53% tax on withdrawal worse case scenario. Pointless.
There’s talk of perhaps scrapping the 25% tax free element but again this would be political suicide unless it was retrospective. Historical pots and schemes would have to honour this otherwise there would be widespread strikes and resentment. (NHS/military/police etc)
Higher rate taxpayers if being taxed on way in and way out would simply stop contributing or if they continued to do so their take home pay would take a considerable dip. This in turn slows the economy down as people would have less free disposable income to spend. This then slows the economy which then results in job losses, unemployment and an increase benefits bill for the government. In addition to that, if people are no longer saving like they have been doing then there is an increased likelihood that these people will then become a burden on the state later in life when their vastly reduced pension pots have run dry.
The DB schemes would be a nightmare to overhaul, would employers then have to pay tax on contributions or would this then drop to the employee as a BIK tax?
This would be political suicide. Nothing will happen.
Boris has muted proposals to increase the higher rate band to £80k which would naturally see a lot of pension tax relief clawed back as the majority of earners would fall into basic rate tax.
As a Scotsman myself, I am hoping he does start to increase this higher rate band as this would force the SNP’s hand to align the bands. At the moment there’s about £6600 worth of 53% tax but if this increased to £16/26/36k (£60k/£70k/£80k) then SNP would have to act and realign.
20% flat relief would do no one any good. Majority of pension schemes use a salary sacrifice arrangement (most tax efficient way) so the minimum relief on offer is currently 32% (20% tax, 12% NI)
Creating a flat rate at 20% would hit millions of basic rate taxpayers who are currently getting 32% relief. Higher rate taxpayers benefit from 42% relief so not all that much different.
Then there’s the question of double taxation. Taxed on the way in, taxed on withdrawal.
For Scotland, some of us are paying 53% taxation due to the £43,400 - £50,000 band. If for example the government created a flat rate at 20%, it would cost you 33% just to put that money into your scheme (If you fell within that 53% band). You would then get taxed at a minimum of 19/20/21% on withdrawal but possibly as high as 53% on the way out. (Again depending on the withdrawal rate) 33% tax on way in and 53% tax on withdrawal worse case scenario. Pointless.
There’s talk of perhaps scrapping the 25% tax free element but again this would be political suicide unless it was retrospective. Historical pots and schemes would have to honour this otherwise there would be widespread strikes and resentment. (NHS/military/police etc)
Higher rate taxpayers if being taxed on way in and way out would simply stop contributing or if they continued to do so their take home pay would take a considerable dip. This in turn slows the economy down as people would have less free disposable income to spend. This then slows the economy which then results in job losses, unemployment and an increase benefits bill for the government. In addition to that, if people are no longer saving like they have been doing then there is an increased likelihood that these people will then become a burden on the state later in life when their vastly reduced pension pots have run dry.
The DB schemes would be a nightmare to overhaul, would employers then have to pay tax on contributions or would this then drop to the employee as a BIK tax?
This would be political suicide. Nothing will happen.
Boris has muted proposals to increase the higher rate band to £80k which would naturally see a lot of pension tax relief clawed back as the majority of earners would fall into basic rate tax.
As a Scotsman myself, I am hoping he does start to increase this higher rate band as this would force the SNP’s hand to align the bands. At the moment there’s about £6600 worth of 53% tax but if this increased to £16/26/36k (£60k/£70k/£80k) then SNP would have to act and realign.
Edited by Leo-RS on Sunday 9th February 22:08
Leo-RS said:
<snip>
This would be political suicide. Nothing will happen.
In saying that, I hope that they don't do it. But I would think it could be an option.
There’s the devolved aspect to consider too. Scotland has its own rates 19/20/21 at basic rate. If England decided it was scrapping salary sacrificing schemes and capped all relief at 20% then how would that be fair to the 21% tax payers in Scotland? If Scotland increased this again to 22% etc then it would be even more misaligned. This would have to be agreed between governments and the SNP and Tories don’t agree on anything.
Yes, reducing the £40k annual allowance downwards is a good idea on paper. However, complicated in itself with senior NHS staff who with a defined benefit scheme may run into issues if this was reduced. Senior consultants and staff on over £110k pay around 15% of their salary into their schemes. So they will already be paying £15k-£20k already in personal contributions. DB schemes are said to pay in upto 20% in some years to make the maths work. That would take them over the thresholds especially if they are reduced. I believe the government are currently in consultation with the NHS for this exact issue. LTA at £1.05m then becomes an issue for these staff as they soon run into this with a DB scheme.
No easy answers.
Yes, reducing the £40k annual allowance downwards is a good idea on paper. However, complicated in itself with senior NHS staff who with a defined benefit scheme may run into issues if this was reduced. Senior consultants and staff on over £110k pay around 15% of their salary into their schemes. So they will already be paying £15k-£20k already in personal contributions. DB schemes are said to pay in upto 20% in some years to make the maths work. That would take them over the thresholds especially if they are reduced. I believe the government are currently in consultation with the NHS for this exact issue. LTA at £1.05m then becomes an issue for these staff as they soon run into this with a DB scheme.
No easy answers.
It’s much worse for nhs consultants (and some GPs) than you note above - if in a defined benefit scheme, the increase in pension is not based on contributions but 16x the increase in annual pension. So a £2500 increase in pension (above inflation) makes you hit the £40k. Anything above the £2500 and you have a tax charge to pay on a notional measure of income that you won’t actually get until years into the future. And lots of GPs and consultants can do that quite easily in a year where their pay increases significantly more than inflation - all of their pension built up before April 2015 is final salary and plenty of them will have 30 years plus pre-then. So some really big swings can happen. Hence the headlines about doctors refusing overtime because the tax they would pay on pension would more than outweigh the income they got. Reducing relief on contributions to 20% would massively tick off all of these people. Plus all public sector employees on more than £50k. Ouch.
And they have already reduced the £40k allowance to £10k if you earn £210k (with tapering from 150-210) which has made the problem much worse for nhs consultants and GPs.
And they have already reduced the £40k allowance to £10k if you earn £210k (with tapering from 150-210) which has made the problem much worse for nhs consultants and GPs.
I'm afraid the chance of anyone giving two political s
ts about the plight of people with incomes where the tapers kick in is zero. It's a tiny group, so welcome to the tyranny of the majority.
The attempts of NHS doctors to explain their plight a few months ago showed how entirely out of touch they are with economic reality. Someone at the BMA needs to tell these plonkers to stop opening their mouths in public and use backdoor appeals to fight their corner. "I got taxed a lot because instead of earning five times more than most people, I started earning six times more. Can you understand my plight?"
ts about the plight of people with incomes where the tapers kick in is zero. It's a tiny group, so welcome to the tyranny of the majority.The attempts of NHS doctors to explain their plight a few months ago showed how entirely out of touch they are with economic reality. Someone at the BMA needs to tell these plonkers to stop opening their mouths in public and use backdoor appeals to fight their corner. "I got taxed a lot because instead of earning five times more than most people, I started earning six times more. Can you understand my plight?"
ATG said:
I'm afraid the chance of anyone giving two political sts about the plight of people with incomes where the tapers kick in is zero. It's a tiny group, so welcome to the tyranny of the majority.
The attempts of NHS doctors to explain their plight a few months ago showed how entirely out of touch they are with economic reality. Someone at the BMA needs to tell these plonkers to stop opening their mouths in public and use backdoor appeals to fight their corner. "I got taxed a lot because instead of earning five times more than most people, I started earning six times more. Can you understand my plight?"
It becomes political when operations are cancelled or delayed because doctors refuse to take on extra shifts due to penal marginal tax rates.ts about the plight of people with incomes where the tapers kick in is zero. It's a tiny group, so welcome to the tyranny of the majority.The attempts of NHS doctors to explain their plight a few months ago showed how entirely out of touch they are with economic reality. Someone at the BMA needs to tell these plonkers to stop opening their mouths in public and use backdoor appeals to fight their corner. "I got taxed a lot because instead of earning five times more than most people, I started earning six times more. Can you understand my plight?"
It seems unfair to tax someone on income that they can't receive for many years, or will never receive if the die before retirement.
Leo-RS said:
As a Scotsman myself, I am hoping he does start to increase this higher rate band as this would force the SNP’s hand to align the bands. At the moment there’s about £6600 worth of 53% tax but if this increased to £16/26/36k (£60k/£70k/£80k) then SNP would have to act and realign.
As a Scotsman I think you underestimate the stubbornness and stupidity of the SNP. Any problems with their tax bands like everything else will be blamed on Westminster. Edited by Leo-RS on Sunday 9th February 22:08
I think many people on PAYE don't actually realise they are paying 53% between 43k and 50k. Plus anyone getting the marriage allowance losss it as a higher rate taxpayer. 43k in Scotland. 50k in England.
LeoSayer said:
It becomes political when operations are cancelled or delayed because doctors refuse to take on extra shifts due to penal marginal tax rates.
It seems unfair to tax someone on income that they can't receive for many years, or will never receive if the die before retirement.
Only until you consider how everyone else contributes to their pensions. All higher earners get huge marginal tax rates as you move into the top 1% of earners.It seems unfair to tax someone on income that they can't receive for many years, or will never receive if the die before retirement.
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