Adam Smith Institute

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Ed Miliband proposes double taxation of incomes

This is a woefully bad policy proposal from Ed Miliband:

The Labour leader pledged to cut tuition fees from £9,000 a year to £6,000 from September 2016.

It will apply to students mid-way through their courses, meaning a student in their first year of university today will pay less in their third and fourth years.

The programme will be funded by a £2.9 billion raid on middle class pensioners, and by making graduates earning over £42,000 pay a higher rate of interest on their loans.

We've struggled for a number of decades to encourage people to save for their own old age. The current debates are surrounded by plaintive cries of how we're going to pay for all of that care that the elderly are going to need in the future. So then someone proposes to reduce the amount people save for the future by taxing it more?

Come along now, it's not April 1st yet.

Pensions experts have criticised proposals from the Labour leader Ed Miliband to cut the tax-free amount Britons can contribute to their pensions in order to fund a reduction in tuition fees to £6,000 a year.

Mr Miliband said that he would cut the lifetime limit on tax-free pension savings from £1.25m to £1m, and reduce the tax-free sum saved per year from £40,000 to £30,000 a year, if he wins the general election.

For savers earning more than £150,000 a year, Mr Miliband proposed cutting the pension tax relief from 45pc, the same rate they would pay on earnings, down to the basic income tax rate of 20pc. The Labour leader said these measures would raise £2.7bn to fund the pledge on tuition fees.

But the real problem is not that it's a deeply stupid idea. It's that it's a deeply unfair one.

There is in fact no such thing as "tax relief" upon pensions savings. What there is is "tax deferral". Your pension contributions come from your gross income, before tax. Your investment gains within the pensions wrapper are tax free at the time they are made. But the income you derive from your pension pot pays income tax just like any other income. You do not therefore get "relief" from the taxation, you get deferral of it.

Which is, of course, why that tax "relief" has to be at whatever the marginal income tax rate on income is. Because, and yes this is obviously so, those who do manage to save up to that limit are going to be enjoying pensions that pay one or other of the higher rates of tax. But they will have had that "relief" only at the standard rate.

They are, therefore, paying income tax twice on that same income, once when earned and saved for a pension and again when drawn down as a pension.

It's deeply stupid to dissuade people from saving for their own old ages. But it's grossly unfair to insist that the same income pays income tax twice.

All of us here have our own ideas about party politics but as an organisation we are not, and resolutely so, party political. But of the ideas thought up to gain support at this coming election for one or other political party we'd award this our coveted "worst we've seen yet" prize. Admittedly, we've not yet read the Green Manifesto but seriously, double income tax for those who save for their own pensions?

Absurd.