Independently, John Ralfe and Tom McPhail have written in the Times with their ideas about tax relief.
The John Ralfe proposal. (link embedded)
John would like all pension contributions whether made directly by the employer or as a deductable from the savers pay or bank account – to get a flat rate incentive from the Government set at 30% of the total contribution, those paying higher rate tax would receive less and those who pay lower rate tax payers (especially those who pay no tax and may currently get no tax incentive) – would get more
John Ralfe’s proposals are simple but do not take into account the impact of national insurance and corporation tax, both of which are particularly important to employers.
I support the principal of a flat rate Exempt, Exempt and Taxed system (EET) but I see problems from tax avoidance as employers and employees find ways of using national insurance exemptions through salary sacrifice to outwit our social security system. And if employers can find ways to get employees tax incentives while avoiding tax themselves, then pensions become a tax-loophole for one part of society and a blackhole for another.
The Tom Mcphail proposal
Because the Times comparison of John and Tom’s proposals are behind their paywall, I have to rely on John’s (helpful) tweets first for Tom’s article
@PensionsMonkey on getting rid of pension tax top-up pic.twitter.com/Sdp1e02xnV
— John Ralfe (@JohnRalfe1) January 25, 2020
For those who have trouble reading the article from the tweet. Tom is proposing that we scrap tax relief altogether and that a system where voluntary saving contributions made “outside the workplace” are matched £1 for £1. So people would pick up what they could from the workplace and would then be heavily subsidised for saving more.
This follows Ros Altmann’s proposals which would make the auto-enrolment band contributions compulsory and put the emphasis on individuals to fill their boots.
I can see Tom’s proposals being very popular with the wealthy saver who would not be capped by the lifetime allowance and not at all popular with those in defined benefit schemes, whose benefits would be capped at a revalued pension of £20,000 pa.
Tom’s proposals (like John’s) don’t deal with national insurance or corporation tax, but as they virtually write the employer out of the picture for heavy pension accrual/contributions , that is explainable.
The Plowman’s verdict; how do these proposals stack up?
Thanks too to John for the tables on the pension impact of Tom and John’s proposals
@PensionsMonkey table pic.twitter.com/cdmRe6DxPf
— John Ralfe (@JohnRalfe1) January 25, 2020
The problem with both of the proposals is that pensions are a lot more complicated than how they impact personal taxation. Viewed from a corporate perspective, it is hard to see how either proposal would impact on corporate tax and national insurance payments.
While the impact on pensions is clear from Tom’s table, the impact on take-homes isn’t.
For a 20% tax payer, the impact of losing tax relief and increasing personal contributions is 1% on most of earnings. The proposal also sees employer contributors increasing by 1% of band earnings and in this compulsory environment – it’s unclear whether contributions will be deemed as deductible for corporation tax purposes or whether they will be NI exempt.
My feeling is that Tom’s proposals would shift the balance of retirement saving towards private investment and away from the workplace. This has clear advantages to certain parts of the financial services markets but it is hard to justify Tom’s claim that this is a “better way”. Tom gets a 50% approval rating from me!
I will come in behind John’s proposals if I can understand how they impact on corporate taxes and national insurance payments.
From the considerable correspondence between John and others, I assume he is looking to maintain pension contributions as free from national insurance on contributions and free from national insurance in payment. This is ok to an extent, but it drives behaviours towards salary sacrifice where there is cashflow pain (and many high earners would see a 30% flat rate as a 15% pension tax).
I’m also worried that giving away 30% flat rate incentives will not sit easy with corporate taxes. The one advantage with the current EET system, is it does seem to work with corporate taxation and I sense that the opportunities for tax arbitrage on pensions with a system of flat-rate incentives , will quickly emerge.
John is keen to show that the transition from current taxation to a moderated system, can be managed by payroll through a pay coding adjustment. This is likely the case, but it could be a brutal transition for some and it might need to be accompanied by a modified system of scheme pays, especially where contributions have to be big (to justify current promises on accrual) . I’ll give John’s proposals a 75% rating. Of the two proposals, I prefer John’s
The third and more extreme proposal
The third proposal is more extreme because it sees future pensions as tax-free and future contributions as taxable as a benefit in kind. This is much more radical than other proposals and would definitely require transitional arrangements to deal with the potential cliff-edge issues surrounding take home.
I get regularly beaten up by suggesting this by Ros Altmann, John Ralfe and most likely Tom McPhail (though he is very good at hiding the iron glove).
This third way is actually the best way of reducing the inequalities of the current system and making pensions a lot easier to understand. I don’t think it will find favour with any Government other than one that is prepared to tackle the really big issues of social care and pensions together.
I can give my highest score to this proposal, though I don’t expect the Times to publish it!
I give this proposal 80%, aware that no system of tax-relief will be totally fair and that any system of change will be very hard to implement.
But if you want my score for what we have right now – I cannot rate it better than 1/10!
And how would you have scored our system in 1975 I wonder. Pretty high I hope.
I’m not sure , I was 13 then – was that when you got going? What do you think?
Could it be that it is the Treasury attempting yet more “benefit avoidance”.
NI is a tax, it ceased being a contribution many years ago
Just a point in John’s table under the existing system first column – those on average low earnings of £10,587 are not getting the £105 tax incentive so the resultant pension pot is more likely to be approx £58,600; a LOT less than those who’s earning are just £2k more and a bigger effect of John’s system