Tax on Dividends

They don't, after next April. It was just a special bonus from the government for the first five years.

Because Gordon Brown thinks he can spend your money better than you can. It was part of his first big tax grab in 1997, partly causing the current pension crisis. Of course, it is better if pensioners live on benefits than on decent pensions, because they can be more easily bribed by more redistribution.

Steve

Special bonus my foot. He had to continue the tax relief given for dividends within PEPs otherwise the ISA would have been an abject failure. As it was he cut the tax credit to 10% and gave it a life of 5 years. You may also recall some of the other mad ideas that were put forward initially, like capping the total amount, and reducing the £7,000 to £5,000 after the first year, all of which were abandoned under pressure.

There is still pressure to keep the tax credit reclaim after the end of this financial year. The date for the Autumn Budget has still not been fixed, I believe, but the chances of him retaining the system looks unlikely because he desperately needs all the revenue he can get.

I know. :)

But it sounds like Labour spin to call it a "bonus", when it's a decrease!

It had a negligible effect on the present pension crisis. If you want confirmation look at the rest of Europe who face a similar pension crisis.

Thom

perhaps, perhaps not.

There is no connection whatsoever. Europen pension are based

100% on the principle of today's workers paying the pension of today's pensioners. Changing demographics means that less workers are having to fund each pension and the fact that the amounts are far far too generous has meant that the system is unsustainable. There is no investment effect at all.

tim

You think that a reduction in income of GBP5bn per year is "negligible"? It exacerbated a problem caused by the dot-com mania.

I'm not 100% sure what bit you are referring to. My main point is that the pension crises are almost wholly (99+%) brought about by demographic changes and economic factors (recession, slow down, stock market falls) an not by tax changes.

Thom

The only detailed analysis I've read (in the FT a while back) argued that the impact was negligible. In any case the point at issue was causation and the tax tax changes _in no way_ caused or partly caused the pension crisis the pension crisis would be here either way.

Thom

A 10% reduction in income is not "negligible". It is highly significant. In the context of pension fund income, it has to have been a major factor.

You do appreciate that pension funds pay a large amount of the pensions out of income, don't you?

I tried to find and failed to find the article, but found another source with similar arguments. The 1997 budget reduced corporation tax to companies (return a large chunk of the tax). Given that pension funds invest in these companies it is hard to argue that the 5 billion/year estimate reflects a real cost to the pension funds.

Furthermore there had been lobbying to remove the benefit to non-tax payers because it was felt it distorted company policies (as pension funds are typically very influential or majority shareholders). In a nutshell it was an incentive to companies to pay out excessive dividends and therefore reeduce investment. (There are also companies under the old tax regime that had substantial foreign income that had a tax incentive to pay lower dividends because of tax surpluses they had built up - also thought to be an economic distortion).

Thom

See my other post. Also how is 10% reduction dividend income equal to a

10% reduction in all income (how many pension funds have 100% of income from dividends?).

In any case my point was that the effect was negligible in terms of its impact on the pension crises - it didn't cause it though it may have made impact slightly worse.

Thom

"Thom" wrote

Agreed.

At the time the rules were changed the market dividend yield was around 2%, so the loss to pension funds of the 20% credit was about 0.4%, which is substantially less than the variation in charges between different providers and far less than general market fluctuations. On top of that corporation tax was reduced from 33% to 30% which gave back about half of that - 3/70 times an earnings yield of 5% is 0.21%. Also companies which previously had unrelieved ACT (e.g. due to large overseas earnings) made bigger gains. Also pension funds are free to buy bonds which still get full tax relief.

And when a lot of pension funds decide to get out of equities and into fixed interest stocks, what happens?

Like MIRAS and the married couples allowance?

That's 0.4% of the pension fund value. As annual contributions into a typical pension fund are probably less than 5% of the fund value, that means contributions have to rise by at least 8% to make up for the loss of the tax credit. It is *not* insignificant.

True, but the loss of the tax credit was significant.

But other taxes and costs were increased at the same time IIRC.

Nothing very much, at least in the long run. It's been happening progressively anyway, 15 years ago the corporate bond market was a lot smaller than it is now. Companies have been buying back shares and issuing bonds, partly because of the tax advantages, and that tendancy has no doubt been increased a bit by the tax credit withdrawal. In principle it should be even more true at the moment given that many companies have a dividend yield which is around the same level as the post-tax interest on a bond, although in practice companies mostly seem to have pulled their horns in. The disadvantage is of course that dividends can be cut a lot more easily than bond interest, so there's a limit to how far you can go, in the end someone has to bear the risk.

It is what it is. As I say, after the corporation tax change it's actually more like 0.2%, and over say 25 years that makes a difference of 5% to the final value, less for later contributions, which of course are usually a lot bigger. The average might come out as a few % (Ronald can probably get a better estimate :). You might still say that that isn't negligible, but I would still argue that you'd do far better to focus on charges.

In any case, IMO the structure of tax relief on pensions is all wrong anyway, the benefit is hugely skewed towards the people with the biggest incomes, and apart from general questions of equity I don't think someone earning £100k really needs to be given much incentive to save. Personally I would go for something like a constant number of pounds as a rebate per 1% of salary someone contributes, rather than a constant fraction.

Like what? Remember that Labour started with an austerity budget for the first three years, they only started increasing taxes overall after that.