Why not increase the normal pension contribution rate, rather than the levy?
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Greedy Ba*%ards, that's why.
I've a couple of hypotheses on this.
1. Because of the way pension contribution rates are calculated (post 95 anyway) the lowest paid would have paid nothing or close to nothing. This is because the pensionable salary is calculated by [gross salary - (2*COAP)]. I'm not quite sure how pre-95 deductions work, so forgive the omission.
Excluding the lowest paid would have reduced substantially the amount raised unless higher paid people were to have a far more substantial levy.
2. Gives the Government a specific bargaining chip for future rounds of pay talks, whether in the social partnership context or otherwise. "We won't raise your nominal salaries, but we will remove the pension levy thereby raising your effective take-home pay".
3. Establishes the principle that the terms and conditions of public sector pensions may be changed for serving public servants.
I think it would have been fairer, and afforded the lowest paid better income protection in view of the extremely limited pension benefits they get, to increase the contribution rate on the same calculation basis (even though it would probably cost me more!). Though I still maintain that for technical, and perhaps not-retiring-any-time-soon reasons, I'd have preferred a nominal salary pay cut, since the pension is part of the overall remuneration package.
Also different public service employees pay contribution at different rates. And I think it was to say they could remove or reduce down the line,
But reckon the real reason was it was a last minute calculation and was easier to apply to gross salaries to work out the savings.
But reckon the real reason was it was a last minute calculation and was easier to apply to gross salaries to work out the savings.
They could still have done that, while retaining the [gross - (2*COAP)] basis, by constructing the calculations in a slightly more sophisticated - but not particularly complicated - way.
Say, [gross - (2*COAP)] @ 5% for first 10k, 6% for next 10k, etc., hitting 11% on the 80-90 k, and perhaps topping there or 12% on 90 to 100.
say 2*COAP = 20k [for simplicity's sake on back of envelope calcs]
then person on 20k pays nothing; person on 30k pays 500, 40k pays 1100. Make all of it relievable at only the standard rate of tax.
Looking at a quick calculation, the rates probably need to be adjusted upwards a bit earlier to raise anything resembling the same amount, but it does have the attraction of eliminating anomalies based on the rate of relief - which see people on the standard rate hit harder at certain pay levels - and excluding those people who get minimal pension benefit anyway.
I would see a difficulty in doing that for public sector employees only. And if you extended such a rule to the private sector, you enter a minefield of equity problems because of the wide variety of schemes that exist, and the different rates of employer contribution.
It is anomalous that people on higher pay get a greater tax contribution to their pension schemes, and attention has been drawn to that anomaly in relation to the pension levy. But that is just another instance of an anomaly that already existed.
I see no reason why tax credits have to be tied to the rates at which taxes are charged. Is there anything wrong with giving a tax credit of, say, 25% on all pension contributions? [After you have worked out how to deal with the employer's actual or imputed contribution.]
IF they changed the tax relief would be for all employees and would not be a problem at all. Employers contributions are taken into account before corporation tax so they get their 12.5% relief or whatever it is at the moment.
Actually posted on another thread that they should make the relief 25-30% for all employees, would encourage more contributions from lower paid workers and introduce a bit of equality into it.
Maybe when they were doing their calculations on the back of an envelope they assumed the levy would be different to the pension contribution in that tax relief would not apply (7% of 20 billion = 1.4 billion). Then in the confusion of it all someone from the government said the levy would be appliciable for tax relief.
Ah yes, but it's special because it's still the "levy". And since it's being levied only on public sector employees by means of special rules, there's no reason it shouldn't be subject to additional special rules.
So you don't need to discuss equity problems because you've effectively ring-fenced the issue ab initio.
Yes, you're right that it's a pre-existing anomaly, and it's yet another reason that so few low to middle income earners have adequate - or any - personal pension provision unless they're provided / contributed to by their employers.
I see no immediately obvious problem with changing and flat-rating tax credits as you suggest. After all, there are other taxes and tax reliefs previously linked to the standard rate where that linkage was broken in the last budget [mortgage interest relief, and DIRT - although if I recall correctly, the DIRT rate was only coincidentally so linked in the last few years].
It would have the attraction of being more equitable, although conversely it might deter some higher income earners from making appropriate pension provision. Still, a 25 or even 30% tax credit is nothing to be sneezed at.
Ron Burgundy
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