Pension taxes become a battlefield for the budget

Two seperate groups are pushing for changes to how pensions are taxed in the budget, but could they

There have been two seperate calls recently for the budget to include major changes to the way pensions are taxed, each coming at the topic from a completely difference angle.

The Telegraph reported on a call from the Office for Tax Simplification, an independent body working under the aegis of Treasury, for the state pension to be made exempt from income tax.

James Kirkup writes:

In a report to Treasury ministers, the advisers said that there was a “patchwork of allowances and rules which many in their later years find very confusing” and that taxing the basic state pension made the system significantly more complicated.

"Many of those who do understand that it is taxable feel that this is unjust, given that they have contributed through the national insurance system through their working life," the report said. Among the options identified by the OTS was: "Exempt the state pension from tax altogether."

A full basic state pension is worth £5,311 a year. Exempting that sum from the 20 per cent basic rate of income tax would be worth around £1,060.

The recommendation is one of many in a report explicitly concerned with highlighting "problem areas and possible directions of travel for the future", but it has been leapt upon by the paper -- and it's readers, over 80 per cent of whom want pensioners to be exempt from income tax, according to an entirely unscientific poll on the site.

While one group is pushing for less tax on pensioners, another sees them -- or their pensions, at least -- as a potential source of revenue.

The Times reported (£) yesterday that, in exchange for dropping proposals for a mansion tax, the Liberal Democrats have secured a government review of the tax relief on pension contributions from top-rate taxpayers. Richard Murphy explains the logic in The Guardian:

If I decide to make a contribution to a pension (I'm self employed) I say to my pension company I want to pay £5,000 this year. There are two forms of tax relief: one is at source and one at higher rate. So if I decide to pay £5,000, I actually pay £4,000 and and get topped up 20 per cent in tax relief. If I'm higher rate tax payer then I put that payment into my tax return and as a result I get tax relief at 40 per cent so I get another 1k of tax saving. At the moment there are lifetime limits of around £1.4m. For those over £150,000 there is an annual limit to their contribution of £50,000. This means their tax bill goes down by 25k. People earning over £150,000 get a benefit of £25,000 at a time when the government is saying that the maximum any family can get in welfare benefits is £26,000.

When you come to retire, your pension schemes requires you to buy an annuity, a way of paying you back over your expected life. That's the money you paid in, plus interest. You get get taxed on those payments. The reason you get taxed is that you didn't pay at the time you earned it. It's deferred tax. But if you were liable to higher rate taxes when you earned it, you are likely to pay basic rate when you receive it.

As Murphy points out later, the problem with removing this relief is that it would lead to double taxation -- being taxed when you earn your wage, and then again however-many-years later when it is payed out as a pension. His response is that double taxation is a normal part of tax, since "we tax income then spending"; but if that is the case, then this change would lead to triple taxation.

Instead, these two measures would go nicely hand-in-hand. If the tax on pensions were removed at the same time as the relief on pension contributions is shrunk, then double -- or triple -- taxation would cease to be a problem. And it could still be a net increase in revenue, since it would trade income tax on pensions, which is almost always basic rate, with income tax on wages, which is often a lot higher.

George Osborne waves to delegates at the Tory Conference in 2011. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Why Russia holds the key to resolving the North Korea crisis

China is propping up North Korea’s economy, but it seems to get little influence in return.

For more than half a century, China has seen North Korea as a dangerous irritant as much as an asset. It might be useful for keeping the United States off guard, and regarded as an essential buffer by the military establishment, but China would happily ditch it if there were a better option.

The North Korean regime has tended to be characterised as uniquely irrational and unpredictable. From its perspective, however, its behaviour makes eminent sense: in fact, its argument for developing a nuclear capability closely echoes the rationale of the great powers. It has no declared intent to launch a first strike, but as long as others have nuclear weapons, North Korea reasons they serve a deterrent function. The regime also argues, as others have, that there are associated benefits with civil nuclear power.  

The long history of North Korea’s nuclear programme follows a recognisable path, previously trodden by Israel, India and Pakistan. It goes from the ambition, formed in the mind of North Korea’s founding dictator, Kim Il-sung, through the long years of a clandestine programme, to the gradual revelation of a reasonably mature, if relatively small, nuclear capability. Signalling is also an element in deterrence. The regime is certainly unpleasant and destabilising, but it is a mistake to imagine that there is no clear purpose and no plan.

The dynasty began life as a Soviet puppet, sandwiched between a powerful USSR and a weak China. But from the start, Kim Il-sung’s muscular nationalism and concern for regime survival suggested that he was unlikely to be a docile dependent of either. His attempt to unify the peninsula by force in 1950 led to a bloody war in which Mao Zedong was obliged to come to his rescue. In the course of that war, “fire and fury” did indeed rain down on North Korea: the US dropped as much ordnance on North Korea as it had during the whole of the Second World War Pacific theatre, including the carpet bombing of Japan. To this day, any building site in Pyongyang is likely to turn up some unexploded ordnance. North Korea was born in a rain of fire, which it has incorporated into its national story.

The regime succeeded in maintaining relations with both its patrons through the dramas and tensions of the Sino-Soviet split to the end of the Cold War. But as Kim Il-sung contemplated the future survival of his regime, he concluded that a nuclear programme was essential insurance, both against his major enemies (the US and South Korea) and any territorial ambitions or excessive demands from China or Russia.

China was and remains North Korea’s major ally, but that does not make North Korea obedient. Their bilateral history is a story of growing defiance and increasing alienation: Kim Il-sung ignored Mao Zedong’s attempt to dissuade him from naming his eldest son, Kim Jong-il, as his successor. He had visited Beijing once a year and had promised that his son would follow suit, but Kim Jong-il only visited Deng Xiaoping’s China once, in 1983. His next visit came three years after Deng’s death, a death for which Kim had offered no formal condolences, as even the most minimal protocol required. 

On that visit, Kim heard the unwelcome news that China, already closer to the United States than he would have wished, was to open relations with his bitter rival, South Korea. When the third dynastic leader, the young Kim Jong-un, took power in 2011, relations with China slid further. Tellingly, Kim Jong-un has not visited Beijing at all, nor has China’s leader, President Xi Jinping, visited Pyongyang, although he has held four summit meetings with South Korea.

Kim Jong-un has made his defiance publicly evident. Not only has he chosen to test his missiles and weapons, but he has selected such highly sensitive moments as last year’s G20 summit in Hangzhou to do so.

China is propping up North Korea’s economy, but it seems to get little influence in return, and the value of the relationship has long been openly questioned by China’s foreign policy analysts. China has had little success in encouraging the regime to loosen controls on the economy and make limited market reforms.

 In the current crisis, China has consistently urged restraint, while co-operating with the tightening of UN sanctions. Beijing’s attitude, however, remains ambivalent: it doubts that sanctions will be effective, and is highly sensitive to US suggestions that Chinese companies that breach sanctions would be subject to punitive measures.  For China, the dangers of bringing North Korea to the edge of collapse are greater than the difficulties of seeking another solution.

Today, North Korea’s relations with Russia are warmer than those with Beijing and if President Trump is serious in his search for someone to solve his North Korea problem for him, he could do worse than to call his friend Mr Putin. No doubt there would be a price, but perhaps Trump would have less difficulty in appeasing Russia than in making concessions to Kim Jong-un. 

In July this year, China and Russia put forward a proposal that both sides should make concessions. North Korea would suspend its nuclear and its missile testing in return for a suspension of South Korea’s annual military exercises with the United States. Buried in the joint statement was the assertion that third parties should not negatively affect the interests of other countries.

Both China and Russia aim to reduce US influence in Asia, an ambition greatly aided to date by Trump’s withdrawal from the Trans-Pacific Partnership trade agreement, conceived as a vehicle of US influence; his treatment of long-standing US allies; and his decision to withdraw the US from the Paris agreement on climate change.

Today the US seems poised between demanding that China solve the North Korea problem and beginning a trade war with Beijing. China’s challenge on the Korean peninsula, always difficult, has grown even greater.

Isabel Hilton is the CEO of the China Dialogue Trust

This article first appeared in the 17 August 2017 issue of the New Statesman, Trump goes nuclear