Think tank calls for end to pensions tax relief
Tax breaks on pensions should be scrapped altogether by the government in favour of a single "lifetime ISA", a think-tank has claimed.
Michael Johnson, research fellow at the Centre for Policy Studies, has criticised chancellor George Osborne's new ISAs (NISAs) for not going far enough to help Britons save.
Johnson claims the current pension saving incentives are an "ineffective and inequitable use of Treasury funds", despite costing £54 billion in 2013.
Instead he has called for government to merge the cash NISA, stocks and shares NISA and junior NISA into a single product assigned to each new baby as their names are registered. For every £1 saved into the lifetime ISA - with a proposed limit of £8,000 - the government could contribute 50p, completely replacing the current pensions tax relief regime.
Johnson says: "The lifetime ISA would provide a degree of ready access to savings while simultaneously justifying the Treasury incentive, which demands a term commitment to savings.
"Withdrawals pre-60 would be limited to original contributions... provided that 50p were first repaid to the Treasury per £1 withdrawn. Post-60 withdrawals would be taxed at the saver's marginal rate of income tax."
Although he accepts that this would hit the highest earners hardest, Johnson proposes scrapping the lifetime allowance, reinstating the 10p tax rebate on pension assets' dividend income and allowing savers to give unused pension pot assets to third parties free of inheritance tax, provided the assets remain in a pension.
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.