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.

Rex Features
Show Hide image

Keir Starmer: “I don’t think anybody should underestimate the risks of getting Brexit wrong”

The former director of public prosecutions is now heading up Labour’s response to Brexit. But can he succeed in holding the Tories’ feet to the fire?

Early in his new role as shadow Brexit secretary, Keir Starmer was accused of being a “second-rate lawyer”. The gibe, in a Commons debate, came from none other than Iain Duncan Smith. Starmer was director of public prosecutions for five years and later stood for parliament in 2015. No novice, then. Within a few days, Duncan Smith stood again in the House, this time to offer his apologies.

A fortnight later, I met Starmer at his quiet office in Westminster. He was sitting at a table piled with papers, in an office that, a discreet family photo aside, was unadorned. He had just got back from a whirlwind trip to Brussels, with many more such visits planned in the weeks ahead.

Starmer returned to the shadow cabinet after Jeremy Corbyn’s second leadership election victory last month. “The series of agreements we will have to reach in the next few years is probably the most important and complex we’ve had to reach since the Second World War,” he told me.

Starmer, who is 54, took his time entering politics. Born in 1962, he grew up in a Labour-supporting household in Surrey – his father was a toolmaker and his mother a nurse – and was named after Keir Hardie. After studying law at Leeds University, he practised as a human rights barrister and became a QC in 2002. In 2008, after varied legal work that included defending environmental campaigners in the McLibel case, he became the head of the Crown Prosecution Service for England and Wales as well as director of public prosecutions, positions he held until 2013.

When in 2015 Starmer ran for a seat in parliament to represent Holborn and St Pancras in London, it was assumed he would soon be putting his expertise to use in government. Instead, after Labour’s election defeat under Ed Miliband, he served as one of Corbyn’s junior shadow ministers, but resigned after the EU referendum in June.

Now, he is back on the opposition front bench and his forensic scrutiny of government policy is already unsettling the Conservatives. Philippe Sands, the law professor who worked with him on Croatia’s genocide lawsuit against Serbia, says he couldn’t think of anyone better to take on the Brexiteers in parliament. “It’s apparent that the government is rather scared of him,” Sands said. This is because Starmer is much more capable of teasing out the legal consequences of Brexit than the average Brexit-supporting Tory MP. Sands added: “It would be fun to watch if the stakes weren’t so very high.”

Starmer is a serious man and refused to be drawn on the character of his opponents. Instead, speaking slowly, as if weighing every word, he spelled out to me the damage they could cause. “The worst scenario is the government being unable to reach any meaningful agreement with the EU and [the UK] crashing out in March 2019 on no terms, with no transitional arrangement.” The result could be an economic downturn and job losses: “I don’t think anybody should underestimate the risks of getting this wrong.”

If Starmer seems pessimistic, it is because he believes time is short and progress has been slow. Since the referendum, disgruntled MPs have focused their attention on the final Brexit settlement. Yet if, as he argues, the starting position for our negotiations with the EU is wrong, the damage will have been done. MPs faced with a bad deal must either approve it or “risk the UK exiting the EU without a deal at all”.

It is this conviction that is driving his frantic schedule now. Starmer’s first month in the job is packed with meetings - with the representatives of the devolved nations, business leaders and his European counterparts.

He has also become a familiar face at the dispatch box. Having secured a commitment from David Davis, the minister for Brexit, that there will be transparent debate – “the words matter” – he is now demanding that plans to be published in January 2017 at the earliest, and that MPs will have a vote at this stage.

In his eyes, it will be hard for the Prime Minister, Theresa May, to resist, because devolved parliaments and the European parliament will almost certainly be having a say: “The idea there will be a vote in the devolved administrations but not in Westminster only needs to be stated to see it’s unacceptable.”

In Europe, Starmer said, the view is already that Britain is heading for the cliff edge. It was May’s pledge, that after Brexit the UK would not “return to the jurisdiction of the European Court of Justice”, which raised alarm. And among voters, there is “increasing anxiety” about the direction in which the UK is moving, he said. Even Tory voters are writing to him.

In the Labour Party, which is putting itself back together again after the summer’s failed coup, immigration remains the most vexed issue. Starmer told me that Labour had “earned a reputation for not listening” on the issue. Speaking on The Andrew Marr Show shortly after becoming shadow Brexit secretary, he said immigration was too high and ought to be reduced. But later that same day, Diane Abbott, a shadow cabinet colleague, contradicted him, publicly criticising immigration targets.

Starmer believes there is a bigger picture to consider when it comes to Britain’s Brexit negotiations. Take national security, where he warns that there are “significant risks” if communications break down between the UK and the EU. “Part of the negotiations must be ensuring we have the same level of co-operation on criminal justice, counterterrorism, data-sharing,” he said.

Crucially, in a Labour Party where many experienced politicians are backbench dissenters, he wants to reach out to MPs outside the shadow cabinet. “We have to work as Team Labour,” he stressed.

It’s a convincing rallying cry. But for some MPs, he represents more than that: a lone moderate in what can be seen as a far-left leadership cabal. Does he have any ambitions to lead Labour? “Having had two leadership elections in the space of 12 months, the last thing we need at the moment is discussion of the leadership of the Labour Party.” He has agreed to serve in the shadow cabinet, and is determined to stay there.

Starmer has found his purpose in opposition. “If we think things aren’t going right, we’ve got to call it out early and loudly. The worst situation is that we arrive at March 2019 with the wrong outcome. By then, it will be too late.”

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

This article first appeared in the 27 October 2016 issue of the New Statesman, American Rage