Pensions tax relief: is it so stupidly incomprehensible on purpose?

George Osborne © Getty Images
George Osborne’s “comically stupid” policy could be deliberate

I wrote here last week that if there was one thing I wanted from the Budget it was an end to the nonsense of the taper on pensions tax relief. I’m not alone.

Since the piece was published I have been inundated with emails from readers deeply frustrated by the complications of the whole thing. They mind the higher taxes, of course (one woman found herself paying 100% of her income in tax in the year her defined benefit pension scheme closed, and there is now a ridiculous number of people in the UK praying they don’t get a pay rise that takes their adjusted income over £110,000) but more than that they mind the relentless complication and confusion surrounding it.

Some people are retiring early simply so they don’t have to deal with it. And some companies are refused to cope with the nightmare of the calculations on behalf of their employees (why should they have to deal with calculations that involve the non PAYE income of their staff?). Instead, they just give all their highly paid staff a £10,000 allowance rather than a £40,000 one and leave it at that.

I have always been under the impression that this almost comically stupid policy was introduced by George Osborne as a quick way to be seen to be having a go at the rich. However, Richard Evans, writing in Telegraph, notes the possibility that it could be more sinister than that. What if Osborne realised that the complexity of the policy would mean that people would simply give up trying to figure out their actual allowance and hence end up paying a pile more tax – tax he sorely needed?

This isn’t an absurd suggestion. The general view is that complicated tax systems serve the rich and their accountants very well (loopholes galore!). However, once a system gets to a level of incomprehensible complication – but is still strictly enforced – might it be that it is the state that really benefits?

Consider the introduction of HMRC’s High Net Worth Unit – designed to help the very wealthy pay the taxes they should. Since it was set up, the tax take from these people has fallen by £1bn. That is something that only makes sense if you assume that complicated tax rules and the fear of getting it wrong (and being fined) was making our rich err on the side of caution before HMRC stepped in to help them out. Complication plus enforcement equals fear, which in turn equals a rising tax take?

Merryn

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