Monday, 20 April 2009

Taxing Matters

I am currently reading Robert Peston's 'Who runs Britain?' and recommend it for anyone who wants to get bamboozled by the vagaries of the financial world and find the simple answers on how to get rich quick. One thing it does highlight is that some of the lowest earners in Britain pay more tax than most of the billionaires in this country and that's downright wrong.

However, Peston's blog today is an example of how silly he can be. He points out that hidden in the detail of Alistair Darling's budget announcements may yet be another nail in the coffin of private pensions. The Chancellor is toying with the idea of withdrawing the top rate tax relief on pension payments and that is yet another good reason to think that Brown and Darling are very warped toward the super rich in their thinking compared to the everyday person who is trying to save for their retirement but cannot participate in the super, get-rich-quick schemes of the billionaires like Sir Philip Green who can pay themselves £1.2bn dividends that a) his company has not earned and b) that he does not pay not a single penny of tax on. Yet he gets knighted and adored and we pick up the tab - and he even bumped into me at the Dorchester car park and didn't say sorry. All that money and yet words are cheap......I digress.

Peston's point is that it is inequitable that if a 40% tax earner puts £5,000 into their pension, they get a relief of £2,000 whereas a lower level earner for the same contribution only gets £1,000 relief. He forgets the minor point is that the £5,000 has already been taxed at PAYE at the particular rates of the earners - so all the two people are doing is claiming whatever tax back they paid as an additional contribution to their pension. In this sense, it is not unequal in any way - it is just reclaiming the tax already paid.

They are making their contribution £5,000 gross or whatever tax each of them paid, that's all.

It is daft comments like this that fuel the wrong argument and allows Darling to cut such relief as some kind of 'levelling of the playing field' when he should be incentivising us all to set aside more of our earnings to fund our retirement and not tax us for doing so.

I understand that only approximately 4% of retirees receive two thirds or more of their pre-retirement earnings - most of those are in fact beneficaries of the final salary schemes where full service is achieved typically those involved in public service such as doctors, nurses, teachers, firemen and MPs. Given that the rest of us are typically scraping an income in retirement, regardless of our tax status, surely any incentive to promote contributions to retirement vehicles should be endorsed. We are not talking about tax loopholes or avoidance here (as in the super rich non-doms and private equity merchants so loved by Brown, Blair and Darling and lampooned by Peston in his book) we are talking only a rebate of tax already paid.

Peston's argument should not have been dissipated by factually inept suggestions but to focus on the fact this is yet another reason for people not to save for the future and create a huge legacy of future generations who cannot live off their savings as they are far too little.

What Peston should be focusing on is that this Government is once again trying to dress up the here and now as some kind of prosperous world and leave the bad news to some time later, just like the massive borrowing, unprecedented in post-war Britain, that we will all have to pay for.

What a shame such an influential writer blundered on such an obvious mistake and lost the plot. A bit like his book, really.

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