spigot wrote:XFool wrote:Urbandreamer wrote:The media and talking heads don't make things any better. If you contribute to a pension, as I understand it, most people pay no tax on contributions. Hence a standard rate tax payer gets a uplift of the 20% tax they paid while the higher rate tax payer gets 40%. This is described as regresive! The bloody talking heads claim that the government is giving that contribution rather than not taking the tax at that point.
This is a pet 'thing' with me too, despite it certainly being of no practical significance to me now.
I can sympathise with the sentiment that when making a pension contribution HMRC are only letting you keep your own money when granting tax relief.
No, that's really not the way I see it.
Firstly, the HMRC are not "letting you keep your own money" (IMO). Rather, they are simply not charging you income tax on income that you haven't received. Quite right too! e.g. I'm currently not paying any income tax on Fred the Shred's income, due to my adopting the crafty tax dodge of not being Fred the Shred...
It's easiest to see this in the case of the old DB company pensions. You were 'paid' a gross salary, a certain x percentage of which was immediately diverted into the company pension scheme. THEN, normal deductions to the remaining gross pay were made, NI, Income Tax... and you were paid a nett monthly salary. You did not receive that x% of gross pay (the pension fund did) so you were not charged income tax on it. It wasn't your income despite it originally appearing on your salary slip, you didn't actually receive it...
spigot wrote:However it doesn't seem fair that a 20% taxpayer pays £800 to make a £1000 contribution while a 40% taxpayer only pays £600.
No. Rather, the 20% tax payer was not charged 20% tax on £1000 they didn't actually receive as income. The 40% tax payer was not charged 40% tax on £1000 they didn't actually receive as income. It's the same thing, If you think about it. Much the same as if I don't pay 0.001% income tax on £1000 I don't actually receive as income, or my not paying 1000% income tax on £1000 I don't actually receive as income...
With personal pensions it's the same thing - just a different mechanism. You are still stuck on thinking of the refund of tax
already paid as a 'gift' from the government. IMO this is one of the "subtle errors" in thinking about pensions I was talking about.
Of course I do realise that, because of the likely differentials of income tax rates for HR taxpayers between working and receiving the pension, pension saving is particularly useful for a HR taxpayer. But, as I said, if you think that is unfair then there is another solution...
I should point out that, when an employee and contributing to a pension myself, I was not a HR taxpayer.