Tax cuts for wealthy never just hit the rich

Nick Clegg The Liberal Democrats are at it again. First Nick Clegg said he wanted to hit the wealthy with an emergency tax and now the party is going after pensions and money in individual savings accounts (ISAs).

A Lib Dem spokesman confirmed last week that the party is planning a consultative session on taxation for party members at this month's part conference. And it's pensions and ISAs that will come under the spotlight.

%VIRTUAL-SkimlinksPromo%Clegg and co want to cut the amount you can save into a tax-free ISA and the amount of pension contributions you can make that receive tax relief.

Currently every individual can save £11,280 into an ISA tax-free, with any money made on ISA investments rolling up in the wrapper tax free. When it comes to pensions everyone can make contributions up to £50,000 a year or £1.5 million in their lifetime and receive tax relief on those contributions.

Tax relief is basically free money from the government. If you are a basic rate taxpayer you receive 20% tax relief on contributions, and if you're a higher rate taxpayer you receive 40% tax relief on contributions. The money doesn't go back into your pocket but is used to top up your pension.

There is an argument that the tax reliefs offered, particularly pensions tax relief, mostly benefit the wealthy. Earlier in the year chief secretary to the Treasury Danny Alexander said handing out higher rate pensions tax relief cost the government £7 billion a year, as rumours abounded that the government would scrap the 40% tax relief band in this year's Budget.

It didn't happen but still the debate rages on and now the government is looking for other ways to hit the rich.

However, hitting the rich with cuts to ISA allowances and pensions tax relief also hit the middle classes. Penalising the wealthy will have a knock-on effect and disincentives those on more modest incomes from saving – surely this isn't the government's aim.

Changing the tax rules is dangerous ground. One reason people don't save into pensions already is because the tax rules are complex and goalposts are forever moving. ISAs have proved popular for exactly the opposite reasons, they are simple and people know the allowance inches up a bit each year.

Changing the rules stops people from saving and in these straitened times the last thing the government should be doing is upsetting the savings habits of the UK.

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