Tax on Dividends

They should have stuck to austerity. More government spending does not mean better services, just more waste.

Steve

I make it 0.275%. And that's ignoring the rises in other taxes (see below). Also the yield for pension funds was likely to be higher than the market average, as the tax relief previously available would have made high yielding shares more attractive for pension funds than for the average investor, so pension funds would likely have had more higher yielding shares.

You can compound it over so many years, but an easier way (esp. for company pension funds anyway) is look at the annual total contribution as a percentage of the fund value. It's about 5% for my company pension fund.

Charges are one issue, taxes are another. Just because there is a large variation in charges is no excuse for higher taxes.

Er, how exactly? A high earner may get 40% tax "relief" on pension contributions, but he'll probably pay 40% tax on most of the pension he receives. Apart from the tax free lump sum you are allowed to take from your pension fund, there is no such thing as "tax relief" on pensions. It is "tax deferment". You only gain from this if you pay tax at a lower rate in retirement than you did when you were working.

And how would such a pension be taxed when it is drawn? If you give less tax relief on pension contributions than you charge in tax on pensions in payment then people aren't going to use pensions to save for their retirement.

IIRC the climate change levy, increased stamp duty on business property, higher fuel taxes. Probably others. Like personal taxation where they reduced the headline basic rate but increased the tax take by slealth.

THAT is the main assumption when asserting that a PP is better than an ISA.

IMHO it is a fair assumption for most people in the £40k-£60k p.a. bracket. But it loses its value below that, and above that if the person has a decent size fund or other sources of income in retirement.

But you pay dearly for this "advantage" in the loss of flexibility.

"Andy Pandy" wrote

Erm, pension levels are usually lower than incomes - are they not? In fact, the usual Inland Revenue limit is for pension to be within two-thirds of income. So it is quite possible for someone to be earning (say) 40-50K pa when working, paying 40% marginal tax, then receiving a pension of (say)

20-25K pa in retirement, hence paying only 22% marginal tax.

"Andy Pandy" wrote

... which of course is much more likely for people who pay higher-rate tax when earning - because they can go from 40% marginal tax pre-retirement, to

22% marginal tax post-retirement! - whereas someone paying 22% marginal tax pre-retirement would only reduce tax levels after retirement if they have a very small pension....

Stephen said the system was "hugely skewed towards the people with the biggest incomes" and mentioned the figure of 100k. Someone on 100k is likely to have a pension well into the 40% tax bracket.

Some people on lower incomes can actually get much more "tax relief", eg someone on under 23k with two children could get 22% tax relief on contributions plus

37% increase in tax credits for all their contributions - effectively 59% tax relief! Someone with 4 children could get 59% tax relief if they earn less than 30,500.

I am aware of the pension cap on EPPs, calculated on 3 out of the last

10 years' income before retirement. That's a very nasty catch which very few of the many executives who bought those schemes in the 80s and 90s know about.

But is there such a limit on personal pensions? In effect there is a limit, due to the max % of income you can contribute as you go along, but AFAIK nothing stops you having a fantactic pension, vastly bigger than anything you've ever earned, e.g. as a result of your fund growing due to amazing investment returns.

The Revenue is now proposing to cap personal pensions over £5M or so.

With a typical final salary pension, if they manage 40 years of contributions (often not the case) they would get something like a £150k tax-free lump sum and £50k a year pension, of which less than half would be taxed at 40%. Assume a state pension of £4k, personal allowance £5k (taking a single person for convenience). Another £2k of 10% band and £29k of basic rate, that leaves only about £18k of the pension in the higher-rate band. That still looks good value if all or most of the contributions got tax relief at 40% - certainly a lot better than someone who only gets basic-rate relief.

Actually under current rules you can do a little better, up to age 75 you can still make £3600 of tax-relieved pension contributions even if you're retired. If you put that into payment immediately the effect is to get £900 back tax-free as a lump sum.

Also the tax relief on dividends and CGT is valuable to a higher-rate taxpayer, and although you get the same from an ISA the contribution limits for ISAs are quite a bit lower - the maximum personal pension contribution is just under £40k. And you can defer part of the pension up to age 75 and keep that part of the fund rolling up tax-free.

How?

I don't think that's very meaningful as a way to assess the effect on an individual person, the overall contribution rate in a given year depends on all sorts of things.

Some will, but typically even a good pension will only pay half of final salary so there will be plenty of people for whom the bulk of the pension is in the basic rate band. The 25% lump sum is of course tax free. Also higher-rate taxpayers do still benefit from 25% tax relief on dividends, and probably also from the CGT exemption, whereas people on lower salaries wouldn't pay those anyway. I did put that somewhat badly, people on really big incomes (a million a year say) don't get that much benefit, the main benefit goes to people with incomes around the earnings cap, £100k or so.

As I say, I would expect that people on high incomes would save anyway, so I don't see a reason to give an incentive. Do you really think that someone earning £100k would spend everything and expect to rely on the state pension if they got no tax breaks? If they choose to save in some form other than a pension I have no problem with that.

AFAIR the climate change levy was also revenue-neutral, and the fuel duty escalator was introduced by Kenneth Clarke. Stamp duty I don't remember.

In message , Stephen Burke writes

If you are referring to pension funds then there is no tax relief on dividends.

You still get tax relief on divis in ISAs till next year.

Not quite tax free unless you are in a cash fund, but even so, to what end? At age 75 would you want to have to buy an annuity?

With your financial nouse Stephen, wouldnt you do better relying on your wits with an ISA and a cheap offshore portfolio bond? They would be far easier to get your dosh out of and, if you played your cards really well and didnt have other income taxed at 40% in retirement, you get be quite a bit better off income wise.

OK - but compare with someone earning 16,000 who ends up with a pension of

8000. As their retirement income is less than 17k they'll get the higher personal allowance (when over 65). Assuming 4k state pension, personal allowance of 6.5k, 10% band of 2k, they'll pay basic rate tax on less than half their income. The percentage differential is probably about the same.

Then look at a non earner, who pays no tax but perhaps has capital or a partner who supports them. They are able to put 3.6k pa into a stakeholder pension and get 22% tax relief despite not paying tax! The pension they recieve will likely be within the personal allowance, and so they'd get a better rate differential than the high earner.

Then look at someone with 2 kids earning 22k. As well as basic rate tax relief, they'll get 37% extra in tax credits for all their pension contributions, ie 59% tax relief. Say they get an 11k pension, the first 2.5k is tax free (assuming

4k state pension), the next 2k at 10%, the rest (6.5k) at 22%. I make that an overall tax differential of over 44% - far higher than the highest earner!

Actually, I got it wrong. I make it 0.41%.

For a 2% yield, the tax credit is worth 2%*0.25 = 0.5%. Remember the tax credit treated the amount paid as having suffered 20% tax, therefore is 20%/80% of the amount paid.

The reduction in CT is worth 2%*0.03/0.67 = 0.9%.

In any case, as I said, this is probably too low anyway, since the tax credit available would have made high income shares more attractive to pension funds than to the average investor.

Yes, but it's a quick and easy way of getting a good estimate.

I don't see it as an incentive, rather fair taxation, after all if some of their income is going to be set aside for later years then it would seem sensible to tax it in the year which it is set aside for.

Revenue neutral taking into account the reduction in Corporation Tax?

Irrelavent. Although ISTR this government increasing the escalator over the Tory rate.

Another was the windfall tax on the privatised utilities (which were very popular with pension funds).