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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Erdogan’s purge was too big and too organised to be a mere reaction to the failed coup

There is a specific word for the melancholy of Istanbul. The city is suffering a mighty bout of something like hüzün at the moment. 

Even at the worst of times Istanbul is a beautiful city, and the Bosphorus is a remarkable stretch of sea. Turks get very irritated if you call it a river. They are right. The Bosphorus has a life and energy that a river could never equal. Spend five minutes watching the Bosphorus and you can understand why Orhan Pamuk, Turkey’s Nobel laureate for literature, became fixated by it as he grew up, tracking the movements of the ocean-going vessels, the warships and the freighters as they steamed between Asia and Europe.

I went to an Ottoman palace on the Asian side of the Bosphorus, waiting to interview the former prime minister Ahmet Davu­toglu. He was pushed out of office two months ago by President Recep Tayyip Erdogan when he appeared to be too wedded to the clauses in the Turkish constitution which say that the prime minister is the head of government and the president is a ceremonial head of state. Erdogan was happy with that when he was prime minister. But now he’s president, he wants to change the constitution. If Erdogan can win the vote in parliament he will, in effect, be rubber-stamping the reality he has created since he became president. In the days since the attempted coup, no one has had any doubt about who is the power in the land.

 

City of melancholy

The view from the Ottoman palace was magnificent. Beneath a luscious, pine-shaded garden an oil tanker plied its way towards the Black Sea. Small ferries dodged across the sea lanes. It was not, I hasten to add, Davutoglu’s private residence. It had just been borrowed, for the backdrop. But it reminded a Turkish friend of something she had heard once from the AKP, Erdogan’s ruling party: that they would not rest until they were living in the apartments with balconies and gardens overlooking the Bosphorus that had always been the preserve of the secular elite they wanted to replace.

Pamuk also writes about hüzün, the melancholy that afflicts the citizens of Istanbul. It comes, he says, from the city’s history and its decline, the foghorns on the Bosphorus, from tumbledown walls that have been ruins since the fall of the Byzantine empire, unemployed men in tea houses, covered women waiting for buses that never come, pelting rain and dark evenings: the city’s whole fabric and all the lives within it. “My starting point,” Pamuk wrote, “was the emotion that a child might feel while looking through a steamy window.”

Istanbul is suffering a mighty bout of something like hüzün at the moment. In Pamuk’s work the citizens of Istanbul take a perverse pride in hüzün. No one in Istanbul, or elsewhere in Turkey, can draw comfort from what is happening now. Erdogan’s opponents wonder what kind of future they can have in his Turkey. I think I sensed it, too, in the triumphalist crowds of Erdogan supporters that have been gathering day after day since the coup was defeated.

 

Down with the generals

Erdogan’s opponents are not downcast because the coup failed; a big reason why it did was that it had no public support. Turks know way too much about the authoritarian ways of military rule to want it back. The melancholy is because Erdogan is using the coup to entrench himself even more deeply in power. The purge looks too far-reaching, too organised and too big to have been a quick reaction to the attempt on his power. Instead it seems to be a plan that was waiting to be used.

Turkey is a deeply unhappy country. It is hard to imagine now, but when the Arab uprisings happened in 2011 it seemed to be a model for the Middle East. It had elections and an economy that worked and grew. When I asked Davutoglu around that time whether there would be a new Ottoman sphere of influence for the 21st century, he smiled modestly, denied any such ambition and went on to explain that the 2011 uprisings were the true succession to the Ottoman empire. A century of European, and then American, domination was ending. It had been a false start in Middle Eastern history. Now it was back on track. The people of the region were deciding their futures, and perhaps Turkey would have a role, almost like a big brother.

Turkey’s position – straddling east and west, facing Europe and Asia – is the key to its history and its future. It could be, should be, a rock of stability in a desperately un­stable part of the world. But it isn’t, and that is a problem for all of us.

 

Contagion of war

The coup did not come out of a clear sky. Turkey was in deep crisis before the attempt was made. Part of the problem has come from Erdogan’s divisive policies. He has led the AKP to successive election victories since it first won in 2002. But the policies of his governments have not been inclusive. As long as his supporters are happy, the president seems unconcerned about the resentment and opposition he is generating on the other side of politics.

Perhaps that was inevitable. His mission, as a political Islamist, was to change the country, to end the power of secular elites, including the army, which had been dominant since Mustafa Kemal Atatürk created modern Turkey after the collapse of the Ottoman empire. And there is also the influence of chaos and war in the Middle East. Turkey has borders with Iraq and Syria, and is deeply involved in their wars. The borders do not stop the contagion of violence. Hundreds of people have died in the past year in bomb attacks in Turkish cities, some carried out by the jihadists of so-called Islamic State, and some sent by Kurdish separatists working under the PKK.

It is a horrible mix. Erdogan might be able to deal with it better if he had used the attempted coup to try to unite Turkey. All the parliamentary parties condemned it. But instead, he has turned the power of the state against his opponents. More rough times lie ahead.

Jeremy Bowen is the BBC’s Middle East editor. He tweets @bowenbbc

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue