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.

Chuka Umunna speaks at the launch of Labour's education manifesto during the general election. Photograph: Getty Images.
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After so badly misjudging the leadership contest, how will the Blairites handle Corbyn?

The left-winger's opponents are divided between conciliation and aggression. 

When Labour lost the general election in May, the party’s modernisers sensed an opportunity. Ed Miliband, one of the most left-wing members of the shadow cabinet, had been unambiguously rejected and the Tories had achieved their first majority in 23 years. More than any other section of the party, the Blairites could claim to have foreseen such an outcome. Surely the pendulum would swing their way?

Yet now, as Labour’s leadership contest reaches its denouement, those on the right are asking themselves how they misjudged the landscape so badly. Their chosen candidate, Liz Kendall, is expected to finish a poor fourth and the party is poised to elect Jeremy Corbyn, the most left-wing leader in its 115-year history. For a faction that never ceases to underline the importance of winning elections, it will be a humbling result.

Though the crash has been sudden, the Blairites have long been in decline. Gordon Brown won the leadership unchallenged and senior figures such as John Reid, James Purnell and Alan Milburn chose to depart from the stage rather than fight on. In 2010, David Miliband, the front-runner in the leadership election, lost to his brother after stubbornly refusing to distance himself from the Iraq war and alienating undecided MPs with his imperiousness.

When the younger Miliband lost, the modernisers moved fast – too fast. “They’re behaving like family members taking jewellery off a corpse,” a rival campaign source told me on 9 May. Many Labour supporters agreed. The rush of op-eds and media interviews antagonised a membership that wanted to grieve in peace. The modernising contenders – Chuka Umunna, Liz Kendall, Mary Creagh, Tristram Hunt – gave the impression that the Blairites wanted to drown out all other voices. “It was a huge mistake for so many players from that wing of the party to be put into the field,” a shadow cabinet minister told me. “In 1994, forces from the soft left to the modernising right united around Tony Blair. The lesson is never again can we have multiple candidates.”

While conducting their post-mortem, the Blairites are grappling with the question of how to handle Corbyn. For some, the answer is simple. “There shouldn’t be an accommodation with Corbyn,” John McTernan, Blair’s former director of political operations, told me. “Corbyn is a disaster and he should be allowed to be his own disaster.” But most now adopt a more conciliatory tone. John Woodcock, the chair of Progress, told me: “If he wins, he will be the democratically elected leader and I don’t think there will be any serious attempt to actually depose him or to make it impossible for him to lead.”

Umunna, who earlier rebuked his party for “behaving like a petulant child”, has emphasised that MPs “must accept the result of our contest when it comes and support our new leader in developing an agenda that can return Labour to office”. The shadow business secretary even suggests that he would be prepared to discuss serving in Corbyn’s shadow cabinet if he changed his stances on issues such as nuclear disarmament, Nato, the EU and taxation. Were Umunna, a former leadership contender, to adopt a policy of aggression, he would risk being blamed should Corbyn fail.

Suggestions that the new parliamentary group Labour for the Common Good represents “the resistance” are therefore derided by those close to it. The organisation, which was launched by Umunna and Hunt before Corbyn’s surge, is aimed instead at ensuring the intellectual renewal that modernisers acknowledge has been absent since 2007. It will also try to unite the party’s disparate mainstream factions: the Blairites, the Brownites, the soft left, the old right and Blue Labour. The ascent of Corbyn, who has the declared support of just 15 MPs (6.5 per cent of the party), has persuaded many that they cannot afford the narcissism of small differences. “We need to start working together and not knocking lumps out of each other,” Woodcock says. There will be no defections, no SDP Mk II. “Jeremy’s supporters really underestimate how Labour to the core the modernisers are,” Pat McFadden, the shadow Europe minister, told me.

Although they will not change their party, the Blairites are also not prepared to change their views. “Those of us on this side of Labour are always accused of being willing to sell out for power,” a senior moderniser told me. “Well, we do have political principles and they’re not up for bartering.” He continued: “Jeremy Corbyn is not a moderate . . .
He’s an unreconstructed Bennite who regards the British army as morally equivalent to the IRA. I’m not working with that.”

Most MPs believe that Corbyn will fail but they are divided on when. McFadden has predicted that the left-winger “may even get a poll bounce in the short term, because he’s new and thinking differently”. A member of the shadow cabinet suggested that Labour could eventually fall to as low as 15 per cent in the polls and lose hundreds of councillors.

The challenge for the Blairites is to reboot themselves in time to appear to be an attractive alternative if and when Corbyn falters. Some draw hope from the performance of Tessa Jowell, who they still believe will win the London mayoral selection. “I’ve spoken to people who are voting enthusiastically both for Jeremy and for Tessa,” Wes Streeting, the newly elected MP for Ilford North, said. “They have both run very optimistic, hopeful, positive campaigns.”

But if Corbyn falls, it does not follow that the modernisers will rise. “The question is: how do we stop it happening again if he does go?” a senior frontbencher said. “He’s got no interest or incentive to change the voting method. We could lose nurse and end up with something worse.” If the road back to power is long for Labour, it is longest of all for the Blairites. 

George Eaton is political editor of the New Statesman.

This article first appeared in the 03 September 2015 issue of the New Statesman, Pope of the masses