There are two very different kinds of welfare in the UK. One is the kind that primarily benefits poor people, which is under remorseless attack from the government.
But there’s another kind too, for which there’s still a bottomless pit of cash.
Last week Treasury officials briefed that there would be no change to pensions in the coming budget, despite a widely-circulated consultation on a Pension ISA with no tax relief on investment, or an alternative model based on flat-rate pension tax relief.
The result has been that those with money to invest have been putting in as much as they can, in case either of those things happen in the future. Because if they did, higher-rate taxpayers would lose a fortune. And not even a small fortune.
Pension tax relief costs the Treasury around £35 billion a year, and much of it is a huge bung to the rich. The table below shows the present levels of tax relief on a pension investment of £3,600 a year (£240 a month). If you pay normal basic-rate tax and save that much, the Treasury chips in £720 to your pension pot over the year.
But a 40% taxpayer saving the exact same amount gets twice as much tax relief – £1,440 – and the 45% taxpayer gets even more – £1,620 – paid in by the Treasury.
The Treasury is sensitive about how much it’s subsidising the pension contributions of high earners because the government is bleeding a vast torrent of money to people who plainly don’t need it.
Luckily for them it rarely makes the newspapers, because pensions are boring and the editors of newspapers are exactly the sort of well-paid and savvy people who can take advantage of the juicy scheme, but just how lucrative the present system is for high earners was illustrated by Chris Giles in last Thursday’s Financial Times.
One particularly eye-watering passage can be found here:
But we’re also going to build an illustrative story around those figures, because they aren’t the end of the tax saving potential for high earners.
Our fictional high earner – let’s arbitrarily call him “Boris” – is paid just under £150,000 a year, so he qualifies for 40% tax relief. He has £40,000 in unused allowances and plans to invest the full amount in case the rules change, following the route above.
But our lucky (and ENTIRELY FICTIONAL, remember) Boris was also left a portfolio of gold-mining shares by his Auntie B, and gold has risen in value in recent months. At the end of November last year it was trading at $1061 and is now $1246. When the gold price rises this leverages the price of mining company shares.
Boris calculates he is sitting on a profit of just over £11,000 on these shares. As he hasn’t used his capital gains tax allowance and the tax year is running out, he could take the profit to pay off the £10K left on the bank loan and leave the full £40,000 in his new pension pot.
Boris is happily married to Clarinda, who works in the City at something nobody really understands. She’s also a higher rate taxpayer and has used the same process as hubby Boris to turn £14,000 into a new pension pot of £40,000. Clarinda is only 52 so can’t move to drawdown and still has £10k left on her bank loan, but when annual bonus time comes around she gets enough to clear it in one go.
Boris and Clarinda earn a very healthy £295,000 between them. They also have money in stocks and shares and pay the maximum £15,240 into ISAs every year, where there’s no further tax on dividends and no Capital Gains Tax on profits.
They’ve each put £15,240 into an ISA and £14,000 into their pension, for a total of £29,240 each in tax shelters. They’ve used their Capital Gains Tax allowances to save £8,576 of tax, reducing the cost of those investments to a combined £71,328.
But in just one year – and there’s nothing stopping them doing much the same again next year, and every year – they’ve just managed to effectively increase their joint savings pot by a whopping £110,480.
Who paid in the extra £40,000? You, the hapless and unsuspecting taxpayer did. And by keeping the rules the same, the UK government is going to make sure you keep subsidising Boris and Clarinda’s comfortable retirement. Don’t let anyone tell you the Tories are reducing welfare, readers. They’re just redirecting it.