Gordon Brown's decision to cut the basic rate of income tax to 20% was clearly signposted by the proposals for tax relief on personal accounts, claims Standard Life.
In the Budget on Wednesday, the Chancellor announced reforms to the income tax system including the removal of the 10% rate of tax, a reduction of 2% in the basic rate, while the higher rate tax band of 40% will not be triggered until people earn above £43,000.
However, while the reduction came as a surprise to many, Standard Life says the government’s proposals for the savings scheme provided a “clue” to Brown’s decision, as the 20% rate “fits in perfectly with the 3% employer contribution, 4% employee contribution, 1% tax relief structure of personal accounts”.
It points out at the previous level of 22% tax, the tax relief on a 4% employee contribution would be 1.13%, instead of the 1% proposed in the pensions white paper, although the government had confirmed despite this, the normal tax relief of 22% would still apply.
But Standard Life says the changes announced this week mean the contribution structure is now a “perfect fit”, as a 5% gross contribution from the employee - minus 20% tax relief - equals 4%, making the government’s contribution exactly 1%.
John Lawson, head of pensions policy, at Standard Life, says the Department for Work and Pensions (DWP) offered everyone a premonition of Gordon Brown's tax cutting move when it published its personal accounts white paper last year.
He says: “No one picked up on this possibility at the time, preferring to point out that a 4% employee contribution and 1% tax relief are not a perfect fit when the rate of tax relief is 22%. If the DWP knew about this in advance, Brown must have been planning his grandstand finish for over a year."
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