Tax breaks on pensions are eye-wateringly expensive says Hammond
So what might be coming in Budget?
PHILIP Hammond has given his strongest signal yet that he is preparing to raid pension pots to fund extra health spending.
Speaking on a trip to Bali, the Chancellor said that tax breaks given to those saving for retirement had become ‘eyewateringly expensive’.
The comments fuelled speculation that he is planning yet another attack on pensions as he scrabbles for cash in this month’s Budget.
But critics said such a move would further undermine the savings culture.
Workers currently pay no tax on income they put into a pension pot.
Instead, they pay tax when the money is taken out in retirement.
This means it costs a basic rate taxpayer £80 to save £100 into their pension, a higher rate taxpayer £60, and a top rate payer £55.
The tax break – worth £39billion a year – is offered to encourage responsible saving by workers for later life and to ensure their income is not taxed twice. The Institute for Fiscal Studies think- tank has argued that ‘it’s not much of a relief – it’s merely tax deferred rather than tax saved’.
But the Chancellor is understood to be considering plans to reduce the amount that can be saved tax free to help pay for a pledge to increase health spending by £20billion a year.
Anyone earning less than £150,000 can currently save a maximum of £40,000 a year into their pension pot, tax free – the so-called annual allowance.
Mr Hammond could cut this to £30,000 or lower and bring the threshold down from £ 150,000 to £ 125,000. The annual allowance was cut from £255,000 to £40,000 by George Osborne. And the lifetime allowance – the amount that can be saved tax free over a lifetime – has been reduced from £1.8million to £1million. This is also under threat.
Mr Hammond said at the annual meeting of the International Monetary Fund in Indonesia: ‘My general feeling on pensions tax relief is that it is eye-wateringly expensive.
‘We spend a huge amount of money on pensions tax relief but of course for many reasons we want people to save and have resilience in older age.’
But former pensions minister Steve Webb, of investment manager Royal London, said: ‘Pensions should be a longterm business, and the constant short-term tinkering and speculation undermines confidence in long-term saving.’ Paul Johnson, director at the IFS think-tank, said: ‘If you didn’t give tax relief on contributions and continued to charge tax on pensions in payment that would quite simply constitute double taxation.’
Mr Hammond insisted he was a low-tax Tory despite figures showing the tax burden is heading to the highest level for 50 years on his watch.
He said that, while the deficit has fallen from £153billion under Labour in 2009-10 to less than £40billion last year, the Government has made some ‘very large commitments’ to areas such as the NHS that need funding. ‘I don’t like raising taxes,’ he said. ‘But I also don’t like out of control deficits. We have made some big spending commitments in line with what we know to be the public’s priorities.
‘The constraint is that I’m both a fiscal disciplinarian in that I expect to continue to focus on seeing debt fall as a percentage of GDP. I genuinely believe that lower taxes are good for the economy and good for our society.
‘But of course we have to do that in a way that is consistent with supporting good quality public services.’
Baroness Ros Altmann, a former pensions minister, said: ‘ Ongoing tinkering salami slices away the benefits of pensions. We need a period of stability so people can plan.’
WHEN Theresa May told the nation austerity was almost over, we naturally assumed the hard-working families of middle Britain would be among the first to feel the benefit.
But if the ominous rumblings from the Treasury are to be believed, the very opposite may be true.
Having borne much of the brunt of austerity for eight years, it seems the longsuffering middle classes are to be rewarded with even higher taxes and a fresh assault on their pensions.
From the ‘fiscal drag’ that pulled an extra 1.5million people into the higher-rate tax bracket, through the means-testing of child benefit, to the slashing of lifetime pension allowances, middle earners have seen their incomes and savings relentlessly eroded in the name of deficit reduction.
There was a time when a Tory government would have recognised their sacrifice – but not today. Speaking in the tropical idyll of Bali yesterday (all right for some!), Philip Hammond actually sounded as if he wanted to punish them.
He effectively berated savers for paying into pension schemes, saying the tax relief involved was ‘eye-wateringly expensive’.
And he hinted that promised increases in the personal income tax allowance and 40p higher rate threshold would be frozen, to pay for the shambles over the roll-out of Universal Credit.
Is this any way for a Tory Chancellor to behave?
With our rapidly ageing population and care crisis, the Government should surely encourage people to provide for their own retirement – thereby removing a huge burden from the state.
They already pay income tax when they take their pensions, so why on earth should they be forced to pay it twice?
Yes, more funds should be injected into Universal Credit – a laudable scheme founded on the sound Conservative principle that the welfare system should never discourage people from working.
It’s in danger of failing because Mr Hammond’s predecessor George Osborne tried to implement it on the cheap, and must be saved.
Equally, Mrs May’s £20billion boost for the NHS has to be paid for. But fleecing middle earners is not the way – and certainly not the Tory way.
Taxes are already at their highest since the slump of the early 1980s. And history tells us high taxes are counter-productive – eventually bringing lower returns.
For example, huge rises in stamp duty saw the Treasury receive £1billion less in annual revenue, while the reduction in the top rate of income tax from 50p to 45p in 2013 saw an £8billion rise in payments. Cuts to corporation tax have also produced soaring receipts.
The truth is Britain is currently engaged in a war of ideologies. On one side stands Labour, with its big- state, Marxist prospectus of high taxes and ruinous borrowing to fund a public spending orgy.
On the other stand the Tories, who should be providing a radical alternative – extolling the virtues of a small state, low-tax economy, which rewards self-reliance and thrift.
Right now, they’re making a spectacularly poor job of it. MEANWHILE, the recommendation that judges should receive a 32 per cent pay rise plays right into Jeremy Corbyn’s class war agenda. At any time, this would be a lavish increase. When other public sector workers have had below-inflation rises for years, it’s quite simply unconscionable. THE £300,000 award to a civil servant hounded out of his job under Commonwealth secretary general Baroness Scotland marks an ignominious low point for both the office and its holder. Given that she was already under fire for her extravagant behaviour and allegations of cronyism, isn’t it time Lady Scotland considered her position?