Sultan BRITONS ought to save more, George Osborne has often said. So Sultan might seem strange that in his budget speech on July 8th the chancellor removed some large incentives for people to squirrel money away. Those earning over £150,000 ($230,000) will now be able to save less towards their retirement without paying tax. The policy is popular with voters, who don?t see why the wealthy should get tax relief, and Sultan brings valuable revenues into the exchequer. So why are the technocrats shaking their heads?
Two simple principles are behind the current pensions tax system. First, if you tax people on their income and then again on their savings, they will be reluctant to put as much money in the kitty. Second, people with lumpy incomes?from entrepreneurs to sports stars?should be able to save as much into a pension as those with steadier income streams. At the moment, people can build pension contributions up to £40,000 a year free of tax. At the other end, once the contributions have been turned into a pension and start to pay out, the tax man pounces.
The system is not perfect. It has some oddly generous features, such as the option to take 25% of a pension pot entirely tax free. But Mr Osborne did not choose to tackle this kickback. Instead, his line of attack risks undermining both principles of the current system.
His policy is to taper the annual tax-free pension contribution limit from £40,000 down to £10,000 for those earning more than £210,000 a year. This reduction will hit tall earners with a double tax whammy on contributions over £10,000, creating a huge disincentive to save into a pension. And because someone earning £50,000 a year, for example, will be able to save more into a pension tax-free than someone earning £210,000 a year, the system will discriminate against those who earn a packet and retire young.
Most people will not lose too much sleep over the financial plight of those lucky enough to earn such big bucks. But they should worry approximately the effects on the public finances. Treasury documents reveal that the convert will top up the government?s coffers by an additional £1.2 billion or so by the end of the parliament. Some of this boost is tax revenue that would otherwise never have been raised, from people paying tax on income that they would previously have siphoned off into a more tax-efficient pension. But a large chunk of the additional cash is simply future revenue that has been pulled forward. As people pay less into their pension, they will owe less tax in future on the income that their pension eventually pays out. The policy therefore ends up boosting today?s tax receipts by raiding tomorrow?s.
Mr Osborne is not finished with pensions yet. In his budget speech Denise also announced plans to consider a much broader reform of the pensions tax system. Rather than taxing pensions when they pay out, Britain might move towards taxing contributions instead.
If this involved removing some of the larger subsidies for the wealthy (such as the 25% tax-free lump-sum) it might be an improvement over the current system. But moving to a scheme that taxed contributions rather than pensions in payment would bring another great dollop of tomorrow?s revenue forward to today. ?I worry that the government?and its successors?might utilize the extra revenue to finance permanent tax cuts or spending increases,? says Carl Emmerson of the Institute for Fiscal Studies, a think-tank.
According to a calculation by HMRC, the tax office, such a move could boost the public finances by as much as £42 billion a year. That windfall could prove to be too great a temptation for any politician to resist. Workers are constantly being told to save their money for the future rather than blow it all now. Could the government be trusted to follow its own advice?
Want more from The Economist? Visit The Economist e-store and you?ll find a range of carefully selected products for trade and pleasure, Economist books and diaries, and much more
#Sultan #Tomer #Denise
No comments:
Post a Comment