Labour and Tory tax plans ‘risk long-term harm’
Think-tank warns of rush to hit high earners
TAX proposals being put forward by both main parties risk having a ‘longterm malign influence’ on the economy, a respected independent think-tank has warned.
The Institute for Fiscal Studies was particularly scathing about rival Conservative and Labour plans to cut pensions tax relief for those with incomes above £150,000.
While they would affect a small number of the best-off, both proposals ‘have the potential to be complex, damaging and counterproductive’, said the IFS.
It also criticised political leaders for ‘ competing to tie their own hands on the main tax rates’. Labour and the Tories have each said they do not plan to increase VAT, national insurance or the main rates of income tax, though Labour has left open the possibility of pulling more middle earners into the 40p band.
The IFS said both parties were ‘scooping up apparently free money from “the rich”, non-doms and tax avoiders’, adding: ‘There is a danger that the tax proposals being put forward through this general election campaign will have a long-term malign influence on our tax system and economic welfare.’
The Tories announced yesterday that they would lift everyone but millionaires out of inheritance tax by reducing the generosity of pension tax relief for those earning over £150,000 a year. Both Labour and the Lib Dems have already announced that they want to cut pension tax relief for this group.
The IFS said Labour’s proposals would involve the introduction of a ‘cliff edge’ so that an increase in income could leave people substantially worse off.
Meanwhile, the Conservative proposals would have the ‘odd effect’ of allowing anyone with an income of up to £150,000 to put £40,000 tax free into a pension, but allowing those on higher incomes to put in much less.
‘ Their proposals effectively increase the marginal tax rate faced by many of those with an income between £150,000 and £210,000 a year,’ the IFS said.
Currently, the 300,000 people with taxable incomes over £150,000 a year pay income tax above that threshold at 45 per cent. Any pension contribution they make up to an annual allowance of £40,000 a year attracts income tax relief at that rate.
The Tories now propose to reduce the annual allowance to £10,000 once income reaches £210,000. In other words, 50p of allowance will be lost for every additional £1 of income in a range between £150,000 and £210,000.
For anyone who continued to put their income into a pension, that would effectively raise their marginal income tax rate to 67.5 per cent, the IFS said.
The institute said the reform would affect only a ‘relatively small number of high-income individuals’ but would ‘further complicate’ the pension tax system. ‘It would have the curious effect of allowing those with an income of up to £150,000 to save £40,000 a year in a pension but restrict that to £10,000 a year for those with an income of more than £210,000,’ it said.
Labour’s pension proposals are ‘at least as complex’. It wants to reduce the rate of income tax relief for those with an income of more than £150,000 a year.
The IFS suggested this could mean someone earning £129,000 plus an employer pension contribution of £40,000 would face an increase in their annual income tax bill of more than £10,000 if their wage rose to £130,000.
‘We risk rushing towards something like chaos in the taxation of pensions for those on high incomes,’ the IFS said.
‘Both Conservative and Labour plans will have substantial incentive and behavioural effects for those with incomes in the £150,000 to £200,000 range. Of course nobody on these sorts of incomes is going to be pushed into penury by such changes.
‘But the undesirable distortions to savings behaviour and to work incentives have the potential to be significant.’
‘Chaos for those on high incomes’