Life-cycle saving taxation Essay Example | Topics and Well Written Essays - 2000 words

Life-cycle saving taxation - Essay Example In addition, an employee is able to claim tax relief through the tax return if the pension contribution is not catered in the deduction of tax by the employer. Similarly, individuals under the personal scheme forfeit income tax before the pension contribution is catered. However, the tax is reclaimed by the pension provider at a basic rate of 20 per cent (HMRC.com, 2014). In addition, an individual is able to claim back the excess tax remitted through the tax return. However, the maximum amount of income saving that enjoys tax relief under the current taxation system is  £50,000. Furthermore, an individual taking early withdrawal from the pension pot before the retirement age is liable for paying tax bill that is equal to 55 per cent of the pension savings withdrawn. However, if an individual withdraws the pension after reaching the set out age, he/she will pay tax depending on the taxable income after the tax-free allowances (HMRC.com, 2014). The tax that individuals pay on their pension is a lump-sum tax that is a fixed tax regardless of the asset owned or income. Consequently, household income savings are not taxed in UK but they are taxed when the savings is withdrawn. This strategy encourages savings in the country from household income earned during their working days to consume it in their retirement at a fair taxation scheme. The proposed taxation system by the author is one that observes the neutrality principle in taxing the income savings. Neutrality principle in taxation is the condition where the individual’s efficacy in the economic well being is not hindered by taxation mechanism employed by the policy makers (Anderson, 2012). This implies that the taxation of the households’ savings should be done in a way that does not distort their choice on the time they should consume income. In addition, the taxation system should avoid distorting the choices households