Coffee House

George Osborne, balancing the budget on the backs of the rich

20 November 2012

12:36 PM

20 November 2012

12:36 PM

George Osborne has a dilemma to answer in his autumn statement (which must be finalised by 28 November, when it will be submitted to the Office of Budget Responsibility). He has promised to offset politically welfare cuts worth £10bn with tax increases on the wealthy. There is an added complication in that Osborne cannot afford (literally) to choke recovery by imposing levies on sources of wealth creation. This leads him, logically, to pensions and property. The FT reports that the chancellor is considering reducing the maximum level of tax relief on annual pension contributions from £50,000 to either £40,000 or £30,000. It is estimated that these changes would net the Treasury an extra £600 million or £1.8bn a year respectively.

It is fashionable to see this as a political trade-off with the Lib Dems. There is doubtless a fair portion of truth in that analysis; yet Osborne knows that the Tories have a perception problem. They are seen, rightly or wrongly, as the party of the rich; a perception reinforced by the recent cut in the top rate of income tax.


Osborne, therefore, is looking after Number One. Indeed, if the priority was to seduce the Lib Dems, Osborne might have adopted their policies on property taxes (the mansion tax and new council tax bands, for instance). But these were rejected outright by the Tory High Command, partially on grounds that they would constitute a clear assault on some very ordinary folk who live in the south-east; in other words, the party’s people. The Tory leadership may aggravate its base by striking controversial poses on social issues; but it won’t take the risk on serious issues like trashing people’s homes and life’s work. The Tories might emphasise that they are on the side of the aspirational classes more often than they do.

Will Osborne’s alleged plan prove sufficient politically? The first Osborne budget cut tax relief on pensions from £255,000 to £50,000. This enormous drop did not stop the Tories being susceptible to the charge of being ‘the party of the rich’. On the basis of this record and the strategic mistakes made in the 2012 budget, I doubt that the proposed change, should it be realised, will alter the perception unless the Tories convince the public that their policy will make pensions fairer. Selective quotation of a Centre for Policy Studies briefing note suggests how this might be done. The CPS notes:

‘Before savaging tax relief, its purpose should be considered. Many would accept that it should be, ultimately, to reduce pensioner poverty, by encouraging more long-term saving. But the current distribution of tax relief is heavily skewed towards the well-off: the 8% of taxpayers who earn more than £50,000 a year receive almost 50% of all pension tax relief. Clearly, reducing pensioner poverty is not the result. Indeed, one could conclude that tax relief serves as a reverse form of wealth redistribution (the conventional approach being to favour the poor). Arguably, the wealthy do not need such an incentive to save.’

It may be that Osborne would need to introduce a further tax cut for the poor to make this argument stick (or, indeed, he might follow the CPS’ advice and restore the 10p rebate on pension dividends, abolished by Gordon Brown in 1997, and therefore re-incentivise long-term saving and investment). But the increased income tax threshold might easily serve this purpose if Osborne, and perhaps more importantly the Treasury, is reluctant to make substantial changes to the tax system.

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Show comments
  • Under Pressure

    I wonder how the estimates of £600m and £1.2bn were arrived at. If the assumption is that contributions will remain at previously forecast levels, and the savings are just the cost of higher rate relief, then they are probably an underestimate. I imagine the consequence of removing higher rate relief would actually be dramatically to reduce contribution levels, so the savings will extend to lower rate relief as well.

    It’s a mistake to assume this would affect only the rich. I am 59, out of work, and thanks to the removal of final salary pension schemes, under-pensioned. Having been paid notice on redundancy this year I will be a HR taxpayer; I am likely to make a pension contribution to mitigate that, but only to the extent that I can get HR relief.

    Pension contributions near to retirement are a poor bargain just now when they are taxed at the same rate going in and coming out. For any taxpayer.

    The uncertainty makes this difficult. I’d like to wait until March – I may not want to make any further pension contributions, or claim any tax relief at all, if I decide to invest elsewhere. But the uncertainty prompts me to choose now, so I might well write a cheque to my SIPP this week to wipe off this year’s higher rate tax. I certainly need to think about it, given my current household income of about £7000 a year.

  • Rahul Kamath

    There is a subtlety here that this article misses. There is a subset of people on salaries of say between £50-80k, all prolly Tory voters, in their late 40s + still on defined benefit pension plans. They will get hammered by this change as DB plan contributions are quite high due to actuarial assumptions. Not sure how big this group is but it’s prolly atleast as large as grannies with large houses in the SE.

  • Ivelmike

    This is an interesting thread. Just the other day, the landlord of my local was moaning about the cost to him of the payment he was making to customers by charging £2.75 a pint rather than £3.75 as in some other pubs. He was annoyed that this £1 a pint subsidy he was providing was not appreciated by anybody.

  • the viceroy’s gin

    Who’s the tranny walking ahead of Osborne in that photograph? And don’t try to tell me that’s a woman. She’s more masculine than either of the fluffy nerfballs walking behind her.

  • Memory babe

    A lot of these comments just seem to conveniently ignore the fact that the generousity of the A-day personal pension reforms in the early part of the century by the Labour government was unbelieveable even at the time. The pre-A day pension contribution limits were much less generous, here they are:

    Age 35 or less: 17.5% of relevant earnings up to £18,480 max contribution
    Age 36-45 20% up to £21,120
    Age 46-50 25% up to £26,400
    Age 51-55 30% up to £31,680
    Age 56-60 35% up to£36,960
    Age 61 or over 40% up to £42,240

    Source: Daily Mail

    All that is really being proposed here is to restore the limits on pension tax relief to around the pre-2005 level

    The idea that this is some kind of new state theft being proposed is really kind of laughable

    • Rhoda Klapp

      Yes, you are right. But those limits were not realistic. They did not provide enough oppportunity to put away money when you had it if you were in a position of changing jobs and income. Possibly they worked fine if you were in the same job for a long time.

      You need to plan your pension over your entire working life. Maybe fifty years. You cannot do that unless they leave the rules alone. If they change them every five years you are stuffed. The Labour reform you mention allowed some people to fix their pension pots. Some of them may have been the evil rich taking advantage, others were certainly not. Now that money is to be treated as evil rich no matter what.

      In real life young people with mortgages and student loans don’t have the money to put into private pensions. They can’t do it early, they have to make it up in their middle or late years using money from savings or windfalls such as inheritance or redundancy. I know that, and I am only an oxfordshire housewife. Does the treasury not know that or the serious mess they have made over private pensions over the years?

      (I’d like to see all savings treated the same, no tax on interest, do what you like with them, no annuity requirement if you use them for pension, no stupid tax-free schemes with daft rules.)

      • Memory Babe

        Actually you can use up to three years previous unused relief in anyone year, so the max contribution in one tax year is £200,000 or £400,000 for a couple
        This change would reduce the max contribution to £160,000/£320,000 or £120,000/£240,000 in any one tax year

        That seems to allow plenty of scope to make lump sum contributions to me

        • Rhoda Klapp

          Didn’t know that, it seems more reasonable.

    • Ivelmike

      So a theft reimposed is OK? I thought the courts usually increased punishments for second offences rather than just let the accused off because he had done nothing new.

  • Derek

    I used to fear Gordon Brown’s budgets, he’d usually stab the strivers in some way. But George terrifies me, every statement is preceded by talk of wealth taxes and hitting the rich, good politics but doesn’t play very well to his core constituency and doesn’t work, as the fall off in sales of property now taxed at seven percent shows. Higher taxes equals lower activity equals lower yield. Exactly the same with cgt, income, vat, nic. He paints himself into the position where his higher taxes mean lower growth and receipts which in turn mean he has to come back six months later and target the rich again, guess what happens six months later? They are truly inept, I hate saying it but worse than Brown and they are supposed to be on our side. Conservatives shouldn’t be making a play to readers of the Guardian but strivers, the self employed, the self dependent, the entrepreneurs. Instead he’ll keep playing with his spreadsheet to make sure the top decile is disproportionately hit so he can’t point at his picture in the Red Book.

  • Powder

    I don’t want the rich to pay more income taxes. I don’t want anyone to pay more income taxes. Indeed, I want everyone to pay less in income taxes. Absolutely no-one should pay more than 40% of their income to the state, and ‘average’ earners should pay no more than 20%.

    But I do want the rich to pay more tax on their property investments:

    > 100% stamp duty on foreigners buying UK property.
    > 100% stamp duty on anyone buying property through a company.
    > 25% stamp duty on all properties purchased for over £2 million.
    > New council tax bands for expensive properties right up to £100 million plus. Why should the uber-rich at Hyde Park pay the same as a family in an average London semi?
    > Tax relief on residential property investments reduced to zero. Nothing. Nada. If the rental income doesn’t cover your mortgage, tough: welcome to the real world. Sell up or work for a living to earn more, just like owner-occupiers have to.

    That’ll all do much nicely.

  • Q46

    Debt = £2.3 trillion
    Deficit = £121 billion
    Interest on the debt = £43 billion
    Total out more than total in = £121 + £48 = £169 billion.
    Total tax revenues from all taxes = £466 billion.

    “Cutting” welfare and “balancing” it with taxes on “the rich” is, in the North, called workin’ yoursel’ – it is like pretending you are drowning less in 14ft 6in of water than in 15ft. It won’t make any difference.

    Welfare is costing £165 billion per year, which is coincidentally just about what is needed to stop the debt increasing. The NHS costs £170 billion – another coincidence.

    At least £121 billion needs cutting so privatise the NHS to get rid of that blood sucker, then slash the welfare to get rid of that bloodsucker.

    Cut taxes and let people look after themselves with the money left in their pockets and not squandered by useless politicians.

  • Andy

    What we should do is have a root and branch reform of the insane benefits system, and while we are at it we can do the same to the absurd tax system.

    We can reform the benefits system back to what Beveridge imagined, and bring in a flat tax.

  • itdoesntaddup

    Somehow I think the Treasury is over-estimating the proceeds. Many will simply renegotiate to receive deferred incentives rather than pension contributions.

  • HooksLaw

    Floods of rich French and Americans fleeing their massive tax rises will float the UK economy off into the sunlit uplands. (!!)

    As long as people like Mr Blackburn regularly ignore tory tax rises on the rich then yes to tories will be perceived as a party for the rich. He and people like him are the purveyors of perception, he is so dim that he does not realise that its his laziness that create the perception.

  • johnfaganwilliams

    Why can’t politicians see beyond the next three years? They criticise business for not taking a long term view and then act like this. The less people are encouraged to save the less they will have when they retire – and the more they then will depend on the state. I’m not looking to make an annual payment into my pension of £50k+ this year or next – but bloody hell if I was why on earth should I pay tax on the way into the pot as well as on the way out when I take it as “earnings”? If I ever retire I’ll take my little pot to somewhere in the world far beyond the reach of HMG and I’d advise anyone else to do the same. Everything this government does seems designed to make us all lazy, risk-averse and un-ambitious. If we do make some money then, it appears, we should be grateful to the state for taking it off us and re-distributing it as they choose. There is no party now that represents the hard-working people who pay for their children’s education (although thankfully the Academy programme may make that less necessary in the future) look after their own medical care, employ people and, reluctantly, pay the ridiculous taxes that hit us at every turn. No wonder this country is going tits up.

  • hexton

    “The first Osborne budget cut tax relief on pensions from £255,000 to £50,000”

    Do you mean to write precisely that? The cap of £50k is on annual contributions qualifying for tax relief, rather than on annual tax relief.

  • JP

    There is scope for radical and positive change in our tax system. This isn’t it.

  • davebush999

    Just take half of the wealth of the richest 1% and you have solved the deficit. They will still have far more money left than they can ever spend.

    • Jebediah

      Yeah right, just seize people’s money. What could possibly go wrong with that? After all it won’t be your money next… or will it. Advocating stealing other people’s money is the policy of a mendacious and cowardly crook.

    • Keith

      Just take all the wealth of everyone and you have solved the deficit and the debt. Simples.

  • Jebediah

    How much? £10b? Try the international aid budget. Whilst there is still money to send overseas to other people, no British government is justified in imposing hardship on its own people. It is a failure of duty.

  • Rhoda Klapp

    Some of us are not equally rich for all of our lives. We come by money later, or in lumps at inconvenient times taxwise. It is all very well for the CPS to come over all holier-than-thou about tax relief on pensions but for those who have had any notion of pension planning messed up by the tempo of rule changes we do not need any judgmental socialist bastards changing the rules on us again.

    (This doesn’t apply to me, I’ve stopped making pension contributions for other reasons. I do however sympathise with others who will be caught by this change.)

    Oh, and I bet it would not raise anything like the money claimed.

  • niav

    There’s a nasty undercurrent in this post, which is that tax breaks are a “cost” to the state, thus implying that people’s earnings are really not their property, but that of the state.

    Not taxing people on their pension savings cannot possibly be seen as “redistribution” except in a totalitarian view of society, in which we and the product of our work are wholly owned by the government.

    I reject such a hateful, iliberal view.

    • telemachus

      You trade your work profits for an environment that allows you to make them in peace and comfort
      Otherwise you can go to Mali to ply your trade
      To maintain our green and pleasant land free from strife you need an egalitarian fiscal policy
      I can see that wealth taxes-mainly on property can be plagued with anomalies
      Not least for the little old widow living on a pittance pension in a reasonable sized house in the south east
      Pension taxes carry no such anomalies
      It is ludicrous that Paxman gets 50% tax relief on his pension contributions whereas his researcher who is barely able to afford the fare to work gets only 20%

      • Keith

        You clearly have no understanding of trade. Trading involves the making of bargains, which are deemed enforceable because freely made. Stripping people of their earnings in order to bribe the voters is not trade.

      • Archimedes

        Let me understand you. We trade our work profits for a peaceful environment in which we can make them. I understand that bit – basically our right of ownership of property, but then it kinda comes undone when you suggest that we only have a right to property up until the point where the value of that property is greater than the value of another’s property – at that point we no longer have a right.

        I’m not entirely sure why we should trade our profits to pay for a system that would take away our property. I don’t understand why this yields a tangible benefit over the alternative of just allowing thieves to steal our property in an ungoverned society, seeing as though it is just the legalisation of the same thing – at least proper criminals are honest.

        • telemachus

          My actual point agrees with yours. It is the iniquitous tax breaks for the rich on pension contributions that I was decrying

          • Archimedes

            Well, no it doesn’t. You are starting from the assumption that it is an inequitable tax break designed to give the wealthy an advantage, but it is not. The wealthy will always have more money to put into their pension pots than the poor, and so consequently it is only the wealthy that get taxed on their pension contributions at all, so the only viable discussion is whether or not the wealthy should be taxed more on their pension contributions.

            • Hugh

              Yes, but the peculiarity of the higher rate tax break on pensions is that it’s more often than not paid to people who, when they come to actually draw their pension, are only basic-rate payers. Given the government is going to hit the better paid in one way or another, restricting (or frankly scrapping) higher rate relief would be one of the better moves.

              • hexton

                Along the lines of basic-rate relief only, with – perhaps for a transitional period only, to soften the blow – an increase in the annual cap to, say, £100,000? Was that the sort of thing you had in mind?

                If the cap were being amended upwards, there might also be a case for adjusting the current calculations for child benefit, in which net income is calculated after pension contributions (amongst other things). There is, at present, a level of (gross, taxable) income at which one may be able to pay a large pension contribution that both attracts higher-rate tax relief and creates eligibility for child benefit. An interesting feature of the system, even if it doesn’t affect many people.

          • Q46

            You overlook the fact that the money paid into,pension funds is then available for investment in companies which provide goods and services we need and like, and jobs and incomes for people.

            Giving that money instead to the Government means it is not spent on those things, it is spent on foreign aid, EU contributions, bombing Pakistanis and Afghans, paying people not to work and keeping that monstrous State monopoly the NHS staggering bout killing its clients.

        • Q46

          You might add that the way the World works, the essence of Human nature, is value out must exceeds value in, otherwise there is no point in Human enterprise.

          We put value in to get value out for ourselves not to make life better for others.

          We work because the value of the reward exceeds the value of our time and effort put in.

          The assumption is made that the value we get out is greater, the green and pleasant land thing, when we let the Government do it than the value we are forced to put in by taxation.

          It denies we could get better value for our money if we did our own green and pleasant stuff.

          All historic evidence is to the contrary.

          Since 1997 the Government has run up a £2.3 trillion debt on our account – not so green and pleasant.

          • telemachus

            But if adding that value aggravates the rich-poor gap are we doing right by society as a whole?

            • dalai guevara

              Finally someone who understands what the IHDI is all about.

      • johnfaganwilliams

        “peace and comfort” “Mali” – what on earth are you talking about this time?

        • Colonel Mustard

          It’s the troll-bot programming clanking away trying to match words. R2D2 with half its programming corrupted with spitefulness and Soviet references. Ignore it. They switch it off after five.

          • telemachus

            It more often comes out at night
            It is at night Osborne cooks his get rich quick tricks for the rich
            You know his reputation for daytime idleness

            • Hugh

              Are you Yoda?

              • Dimoto

                And once again, the whole thread has gone off at a tangent, because some idiots love to feed the troll.
                Tele 1 Idiot troll feeders 0.

            • Colonel Mustard

              Clank, clank, whirr, clunk. It didn’t quite get what the comment was saying but managed to drop in a Millipedian soundbite again.

    • HooksLaw

      It may be seen as a good thing in normal times that we be encouraged to save now for our future since then we will be unlikely to be a burden on the state and its taxpayers in future.
      However there is surely a limit to what the state should encourage and that should be the level of pension which is necessary to avoid the above burden in future.

      On top of this we are not in normal times, the deficit left by Darling was £150 billion.

      Increasingly the legacy left by Brown and Darling can be seen as a tax collection system which seems to have been totally slanted to helping the rich, both individual and corporate, to avoid their obligations.

      • telemachus

        I think he got it

    • dalai guevara

      You are making the same mistake as Millipede claiming DC ‘wrote a cheque’ to millionaires. We are talking about a 40% tax relief here, only enjoyed by some, compared to a 25% tax relief enjoyed by the rest. It is not your money in the first place in the sense that a ‘relief’ is not a ‘cheque’.

    • David Blackburn

      Thanks for your comment. I don’t follow your logic that recognising the fact tax breaks are a cost to the heavily indebted Exchequer (although, of course, closing tax breaks may harm the Exchequer in other ways) means that you believe people’s income to be the ‘property’ of the state. That logic seems to have confused a simple mathematical observation with a deeply philosophical (and in this case not especially relevant) question.

      If your point is that the Exchequer would be better served cutting more expenditure (on welfare, say) rather than by raising taxes on people’s hard-won income, then I agree with you in theory; but, alas, there is such a thing as politics. That’s the nasty undercurrent in this post, rather than it containing a subversive expression of belief in a totalitarian system of government.

      • the viceroy’s gin

        No, niav has it right. You’re implying, well, you’re doing more than implying, that people are given “breaks” when the government doesn’t coerce them out of their own property. And these “breaks” are a “cost” to the coercers, for whom you’re also giving apologia because they are “heavily indebted”.

        All in all, it’s a hateful and illiberal view, just as niav described it.

        • BenM_Kent


          Don’t be such a drama queen.

    • Ivelmike


      Very good. You are absolutely right.

  • LB

    He’s desperate for cashflow. Hence remove the tax deferral element of pensions. Lets tax pensioners twice being the effect.

    So ask, why is he so desperate for cashflow now?

    The simple answer, the government is bankrupt and running a fraudulent set of books.

    1.1 trillion in debt? Nope. Page 4

    4.7 trillion on top for the state pension.

    13-15 times geared.

    They are bust. Pure and simple.

    • HooksLaw

      Future pension entitlements are not debt.