James ConeyJul 18 2018

In defence of the tax-laden millennials

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In defence of the tax-laden millennials
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I have an unhealthy obsession.

It’s not Love Island – it’s with marginal rates of tax. Sorry to disappoint.

I’m obsessed because of what they really tell you about a household income.

Income tax and national insurance threshold bands are just vague. To get the whole picture, you need a person’s marginal tax rates – how much they lose in tax for every additional pound they earn.

Some of the most obvious punitive rates come at £100,000 (where marginal tax is 62 per cent because their personal allowance is withdrawn) and at £50,000 for families, where child benefit is taken away – giving a marginal rate of around 52 per cent.

This explains why so many families don’t actually feel that well off.

As feared, automatic enrolment has caused widespread levelling down of employer contributions. And that was happening anyway with the shift from defined benefit to defined contribution pensions.

For me though, one of the most striking marginal rates is for university graduates earning around £25,000 a year. Income tax at 20 per cent, national insurance at 12 per cent, but – and I realise I’m straying here – add in student loan repayments of 9 per cent and you’ve got young workers taking home just 59 pence for every additional pound they earn.

Now add in the extra 3pc for contributing to an auto-enrolled pension and you’re up to a marginal rate of more than 44 per cent.

This startling set of figures came to my mind when I saw the Pensions and Lifetime Savings Association’s latest attempt to persuade savers to put more in their pensions.

It wants savers to consider what type of retirement they want.

Comfortable retirement equals foreign travel, modern technology, fine wines and a new kitchen. State pension retirement equals occasional trips to the town centre, no booze, and your friend cutting your hair.

Although it’s well meaning, I’m not entirely sure they’re best placed, as it’s pretty self-serving. It’s a fine principle, and of course, no one wants the vision of an impoverished retirement.

But all this brings me back to my point of marginal tax rates.

Forget about millennials wasting all their cash on avocado brunches and almond milk flat whites: they’ve barely got enough to get by, let alone make bigger pension contributions. They’re only taking home half of what they earn already.

When will they ever get to afford a house, let alone save more? (This may go down as the first time I’ve written a word in defence of millennials).

As feared, automatic enrolment has caused widespread levelling down of employer contributions. And that was happening anyway with the shift from defined benefit to defined contribution pensions.

That is where the biggest impact on pension savings has been seen. Nagging – or striking the fear of God – into young savers won’t do any good. They can’t save more even if they wanted to.

Employers need to take more responsibility or, when push comes to shove, the only answer will be compulsion.

An ugly tax

According to some reports, the government is once more mulling over the idea of cutting, or flattening out, tax relief on pension saving.

I don’t believe a word of it. Such a move would be suicidal for the already-imploding Conservatives. 

There may be agreement that taxes need to rise to fund the NHS, but hitting middle class savers is about as toxic as it gets.

This rumour has become perennial. I can believe that civil servants are weighing up the pros and cons of pensions tax relief. It is the kind of ugly tax that economists and policy wonks hate.

But once it gets as far as any minister the suggestion will always be dead in the water.

What I find most disgraceful is the tacit way most investment firms and industry experts seem to have come round to the idea that tax relief should be flattened out.

It never used to be the case. So what happened? It’s possible the asset management industry has gone native – and is keen to follow the line of the civil servants desperately hawking this idea.

Higher-rate taxpayers still dominate the money pumped into investment funds – and stripping back the relief on offer would just hammer their pensions and assets under management.

In following a politically correct cause, investment funds may just be deserting their core customers.

Are homes electric?

A prediction: the chancellor will launch a generous new subsidy for homeowners who want to install electric car charging ports in their home.

It’s the green cause du jour. And it will be immediately preyed on by eagle-eyed fraudsters.

Cue the latest mis-selling scandal.

James Coney is finance editor at the Daily Mail