taxing state pension

aycor

I am thinking of pettioning Gordon Brown to 'ring fence' the state pension from being included in any calculations for tax assessment. After having already paid tax all those working years why should those of us prepared to work as I do pt. time have the benefits of earning extra swallowed up by the inclusion of the state pension into the equation? I do not mind paying tax on my earnings but the pension is not earnings. What do others think? Can we/ have we got enough power to get this altered? ???
I will be interested in your thoughts on the subject

DavidLaGuardia

I empathise with your thoughts don't agree with your specific point. The age allowance ishould take into account a pensioners needs and reward them for paying tax alll their life and still make very well of pensioners contribute. However, whether or not that allowance is high enough is another point of issue.
I do think that additional pensions made from the imdividual's own contriubtions should not be taxed, to encourage more people to bridge the pension shortfalls in future and that such savings should not be taken into account when calucating the minimum income guaranteewhere some pensioers are being penalized for a bit of thrift

deemy2004

I think it should be taxable earnings.

As its not the amount of the state pension, but the total earnings I.e. if your only income is the state pension, with the top up allowance, then there isn't any tax for a pensioner or very, very little tax due.

Otherwise the rich pensioners would be getting another tax free income, instead of paying 40% on it.

Though saying that, I think payments such as tax credits should also be taxable.

Pal

I disagree but for different reasons.

The state pension is, IMHO, not a REWARD to paying tax. The reward for paying tax is getting to live in a country with roads, schools, armed forces, dustbin men, a police force, a free(ish) health service and so on.

Instead I see the state pension as part of the welfare state. When people reach age 65 they are, if they give up work, essentially unemployed. As a result they are entitled to receive a benefit from the state more or less equal to the benefits an unemployed person would get. The only difference is that it is not means tested and so they do not actually have to give up work to receive it.

The way I see it, the state pensions are designed to provide a minimum standard of living, in the same way as unemployment benefit or income support (or whatever they are called now).

The simply logic to this is that many pensioners over age 65 are not going to be able to work, so the Government might as well pay those over a certain age a minimum level of income to keep them going, and not bother means testing it because it would cost lots of money and be generally frowned on by the electorate who, like nancye, elieves the state pensions to be a reward of some kind. This is despite the fact that the level of National Insurance contributions paid is not actually enough to fund everyone's state pensions, and none of the money currently being paid is actually being saved. The Government simply pools it with general taxes and spends it on today's pensioners, roads, police, NHS, MP's salaries and so on.

If people want to live on more than the minimum state benefit when they retire, they obviously need to save while they are working.

Going back to the original point about tax. If the above is correct, then the state pension is just another state benefit for the unemployed in the same way as job seeker's allowance or income support, the only difference is that state pensions are not linked to employment status or means testing.

So following on from this, why would the Government give people a benefit and then take some of it back in tax? This applies to state pensions, disability benefits and unemployment benefits. It simply doesn't make sense to do this. Either someone needs the minimum or they don't. If they earn more than the minimum, why should they not pay tax on the amount over the minimum?

Why not simply set the tax allowances at a level so that noone pays tax until they earn more than the minimum required to live on, whether it comes from employment, state pensions or unemployment benefits?

The minimum wage should surely also be set at or below the same level in order to ensure that those earning at or below the minimum do not pay tax?

Personally I believe that state pensions should be taxable, however the tax free allowance for everyone should be above the level of state benefits. I.e. people with their own pension savings will pay tax on the additional pension savings but not the state pension. If the Government believes that people receiving state benefits are receiving too much and so should pay some back in tax, it should simply reduce the amount it pays rather than just create work for no reason.

To take this a step further, if £10,000 a year is the minimum on which the Government believes people should live for full time employees (which isn't far away from the minimum wage), then everyone should have a tax free allowance of £10k. It could be higher for those with disabilities, children etc.

In order to balance the tax books, the Government could then choose a tax rate above the minimum allowance which gives it the same level of overall tax income.

For example, give everyone (pensioner or not) a tax free allowance of, say, £15,000. Anyone earning over that level pays 40% tax on all earnings, whatever the source. If the figures worked out most people would pay more or less the same amount of tax.

Easy eh? Tax returns and payrolls would certainly be a lot easier. When I rule the world....

DavidLaGuardia

I agree with much of what Pal has said here.

No wating to go too off topic but I think Income is very heavy compared to taxes on unearned income. Some one with an nherited fund can enjoy a fairly decent dtream of payments tax free over an above someone who has earnt it through crystalizing capital gains after tpaer relief has been taken into account. Take a couple and double what can be achieved.

People see IHT as an evil greater than income tax when it has a farily generous allowance and is non earned income. I can later enjoy what my parents leave me and my siblings from the sale of their house but might be taxed, but it is not money I have earned.
To say it was from income they had already paid tax on is not true as what they paidfor the house, even with interest is likely to be less than the IHT allowance. The taxable balance would be based on what they enjoyed as tax free growth, and clever planning will make the non taxable part of the estate at least £526,000 assuming they have that much by the time their wild lifestyles come to an end! (and good luck to them!)
I therefore do not see why I and others should noy pay 40% on the balance in favour of the treasury having to raise money from elsewhere such as the salaries of others..

Pal

I am rapidly coming to the conclusion that Inheritance tax should be abolished and replaced with capital gains tax on all assets (including the deceased's home) payable on death by the estate before anyone inherits.

This would be complicated to administer so would need careful designing, but would ensure that:

- Inherited money on which tax has already been paid is not taxed again;

- Inherited money on which tax HAS NOT BEEN PAID (i.e. capital gains on shares or the growth in value of your grandparents house) is taxed.

I too see no reason why workers and pensioners pay such a high proportion of their incomes in tax while people who inherit large amounts of unearned income can get most of it tax free.

DavidLaGuardia

Pal you have propoesed an idea which
1. Would not be costly to introduce (in fact with removing IHT there may be a net saving to the Revenue's admin costs
2. Is simple
3. Is faiir to all as far a I can see

I would add to that the reintroduction of indexation as the only logical way of determining real gain.

Pal

Unfortunately I do not believe it would be that simple to introduce a Capital Gains tax on death as establishing the amount of a capital gain would be difficult.

For stocks and share etc it would be easy, but what about the gain on a house? To establish the real gain you would have to:

- Find out what the purchase price was;
- Work out how much had been paid in mortgage interest to buy the house;
- Work out the value that any home improvements had added to the house and how much these cost to carry out
- Apply indexation to the whole lot.

Imagine trying to argue with the revenue about the added value created to the house when your deceased grandparents put up shelves in 1974 at a cost of 7s 6p!

DavidLaGuardia

Unfortunately I do not believe it would be that simple to introduce a Capital Gains tax on death as establishing the amount of a capital gain would be difficult.
.....
Imagine trying to argue with the revenue about the added value created to the house when your deceased grandparents put up shelves in 1974 at a cost of 7s 6p!

Well 7S 6d would have certainly not applied after Feb 1971, it would be 37 1/2 p
I take your point though about the complexity, but perhaps a simplified set of captial allowances other than on major extensions/conversions would limit the complications, perhaps even a simple rate over RPI to account for such things up until a point it is introduced. It's never easy though!