Taxing Poorer Savers
There’s a load of Hooh-Hah in the press and media right now about the removal of the ten pence starter rate of tax and the fact that the changes in the recent Budget were designed to tax the poor. It’s become a big issue over the last few weeks and is looking like a bit of a crisis for the Government. So-called ‘rebel’ Labour MPs are calling for changes to be made so that those who have lost out will be compensated for their loss. The Government is saying, though, that it can’t undo the Budget changes and anyway they’re making a pile of money from the abolition of the ten pence rate and they’d only have to find that somewhere else if they can’t get it this way, so what’s the diff?
But what’s really happened? These changes were announced a long, long time ago. We’ve known about them for yonks now. What’s happened is that Joe and Josephine Average have finally twigged that what was put out as a good news tax cut is in fact a bad news tax increase and they’re not happy about it. Decidedly unhappy, in fact. That appears to be what’s given the ‘rebels’ a severe attack of the collywobbles.
Something else was announced a long, long time ago too. In fact it was announced a really long, long time ago; mega yonks by my reckoning. That was the announcement that ten million, mainly lower paid people are going to be swept into pension saving in 2012 through the process of auto-enrolment. Unfortunately the savings that millions of them will make are highly likely to be subject to what is effectively a tax of 40%. In some cases that effective tax rate could be as high as 100%. The numbers were laid out for anyone to see by the Pension Minister at the time in his internet exchanges with me that the media dubbed the Battle of the Blogs. His figures used in that online argument showed that a £20,000 investment would yield a pension with the value of just £12,000 for someone poor enough to be in receipt of means-tested handouts in retirement; a staggering loss of value of £8,000. (If you don’t believe me catch up with that ancient debate by clicking the link here: Battle of the Blogs Revisited)
But whether you and I and the Ministers know all this or not is irrelevant. It doesn’t matter a bit. What matters is that sooner or later Joe and Josephine Average will spot what’s going on and I’d guess that at that point all hell will break loose. I’m not being funny, but if the losses incurred through the removal of the ten pence tax rate can get people’s blood boiling goodness only knows what they’ll think when taxes of between forty and a hundred percent are applied to the pension savings of the poorest savers in society…..
22 April 2008
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