Lamborghini effect dismissed

Worries that the beneficiaries of the Chancellor's pension reforms would blow their savings on Lamborghinis and fall back on the state have been dismissed by the Institute for Fiscal Studies.

An IFS report explains that most of those who gain from the changes will be well off anyway.

George Osborne announced in his Budget that many savers would be able to do what they liked with their pension pots on reaching the age of 55 and avoid having to buy an annuity, a guaranteed income for life.

The Pensions Minister Steve Webb then said "If people do get a Lamborghini and end up on the state pension...that is their choice."

The IFS research shows that significant numbers will be entirely unaffected by the reforms because they have no relevant pension savings.

Of those currently aged between 55 and 59 just under four-in-ten men and just over two-in-ten women will enjoy greater flexibility.

The vast majority of those are home owners and have significant other assets. They are unlikely to qualify for key benefits such as housing benefit.

The middle range of this group has wealth adding up to £730,000 apiece, including their homes.

Tax pensioners says IFS

The influential Institute for Fiscal Studies is suggesting a dramatic change in the tax paid by pensioners.

It wants the government to look at charging a levy on private pensions in payment, on the grounds that pensioners -- in the opinion of the IFS -- get more out of the tax system than they should.

Make no mistake, this would be a major reform which would result in pensioners paying much more tax.

The IFS argues that it would help to spread the task of dealing with the government’s financial problems "more evenly across the generations".

At the moment pensioners don't pay National Insurance on their pension income, a substantial benefit in comparison to workers who pay 12% National Insurance on top of their income tax.

However, if you save for a pension, that is out of money that is likely to have incurred National Insurance.

The tax break on pension contributions only applies to income tax, at whatever rate you pay. You still have to pay National Insurance on money paid into a pension scheme.

The point of this complicated system is to avoid the situation where pensioners are taxed twice on the same money - once when they pay into a scheme and again when they take their pensions.

The IFS suggests that pension contributions should attract National Insurance tax relief. But pensioners should then pay a charge on their pension income.

To prevent double taxation on people who have already salted away money in pension schemes, this charge or levy should start low, says the IFS, and then rise to the level of National Insurance as the bulk of pension savers began to benefit from National Insurance relief.

The maths favours the Treasury, because the new levy would also apply to pension income which came from pension contributions added by the employer.

Each 1% charged to pensioners would raise £350m a year for the government's coffers, so Chancellors would have a big incentive to push up the levy as quickly as possible.

A Treasury spokesperson commented that there were no plans to put National Insurance on pension income, nor were there plans to change pension tax relief.

2p on income tax?

OK brace yourselves for the tax rises of 2015...

Will it be income tax, will it be VAT? Will it be a combination of different taxes, including more on house sales, inheritance or National Insurance?

Today's Green Budget from the respected Institute for Fiscal Studies points out that by the 2014-15 financial year the Chancellor will be borrowing £64bn more than originally planned to cover his spending.

And that's factoring in all the spending cuts, welfare reductions and tax changes which the government has brought in since 2010.

The borrowing is continuing while the government tries to heave the economy out of its rut and stagger towards the next election.

The point is, what then?

The IFS says:

Over the last 30 years tax rises announced in the year after a general election have averaged £7.5bn.

Considering this trend, and in the context of the current fiscal situation, further tax rises following the next election would not be surprising.

So, maybe an emergency budget after the June, 2015 election, and tuppence on income tax - raising £10bn a year.

Child Benefit cuts slammed

The respected Institute for Fiscal Studies has branded the government's planned cut in Child Benefit as "neither efficient nor fair".

Child Benefit is due to be removed from families with a higher rate taxpayer from January next year.

The IFS is warning that the cliff-edge effect of withdrawing the benefit if one parent goes above £42,475 in earnings will hit hundreds of thousands of families.

200,000 could find themselves with a lower overall income after a pay rise.

Another 170,00 could actually increase their income by taking a pay cut.

The IFS recommends a gradual withdrawal of the benefit for higher rate taxpayers.

It says one route would be to integrate it with means-tested Child Tax Credit.

Ministers have already indicated that they are looking at making the planned Child Benefit changes fairer.

How families will lose £1,250 a year

Tax and benefit blows, plus some gains, which the Family & Parenting Institute and IFS say will result in families with children suffering a £1,250 annual loss by 2015.

The key tax and benefit measures affecting families with children that have already been implemented are as follows:

*The income tax personal allowance increased by £1,000 in cash terms for the 2011–12 tax year;
*Increases in all National Insurance rates and increases in the thresholds at which employees’ and employers’ National Insurance start to be paid;
*An increase in the standard rate of VAT to 20%;
*Cuts to tax credits; in particular a three-year freeze in the basic and 30-hour elements of the Working Tax Credit, an increase in the rate at which tax credits are withdrawn as income rises, the abolition of the baby element of the Child Tax Credit and the withdrawal of the family element of the Child Tax Credit from £40,000 rather than £50,000. These are partly offset by an increase in the child element of the Child Tax Credit;
*Reductions in the maximum amounts of rent that can be claimed in Local Housing Allowance;
*A three-year freeze in Child Benefit rates;
*and The use of the Consumer Prices Index (CPI) to index benefit amounts each year rather than the Retail Price Index (RPI) or Rossi index.

Those to be introduced in 2012–13 include:

*A further increase in the income tax personal allowance above normal indexation;
*Reductions in contracted-out rebates in National Insurance;
*A further lowering of the point at which the family element of the Child Tax Credit starts to be withdrawn
*An increase in the number of hours couples with children need to work to be eligible for the Working Tax Credit from 16 to 24;
*Changes to the way in which tax credit awards are recalculated when a family’s income changes during the year which make the system less generous to such families;
*The withdrawal of child benefit from families containing a higher-rate taxpayer from January 2013;
and Time-limiting contributory Employment and Support Allowance for those in the Work-Related Activity Group.

The tax and benefit changes to be introduced in 2013–14 or 2014–15 that affect families with children include:

*The localisation of Council Tax Benefit accompanied by a 10% fall in expenditure.
*A medical reassessment of Disability Living Allowance claimants that is forecast to reduce the caseload by 20%.
*existing claimants of benefits and tax credits will start to be transferred to Universal Credit from April 2014.