Pension Numpty!

xylophone

Could you explain that in more detail please?

http://www.moneysavingexpert.com/banking/tax-rates

kidmugsy

happyandcontented wrote: »

Could you explain that in more detail please?

My marginal income tax rate is 20%; that is, if I got an extra £ p.a. of income I'd pay 20p on it. On the other hand, if I got (let us say) £50k by drawdown from a pension scheme (the tax-free lump sum having already been taken earlier), I most certainly wouldn't pay 20% tax on it.

I'd pay 20% on the fraction of it that took my annual taxable income up to the threshold for 40% income tax, and 40% on the extra.

So the tax I'd pay would be neither my old marginal rate (20%) nor my new marginal rate (40%), but would be something in between 20% and 40%.

Talk of paying tax at marginal rate is, in general, just rubbish. I'd never heard the expression misused until Osborne abused it in his 2014 Budget speech: his speechwriter should have been taken out and shot.

I'll give you an example where its use would be accurate. Suppose you've deferred your State Retirement Pension for a couple of years, and decide to start it, taking your deferral reward as a lump sum. On that lump sum you genuinely do pay your marginal rate of income tax: by law, the extra money will not force you up into a higher tax bracket. So some people would pay 0% on it, some 20%, some 40%, and so on.

P.S. In case of doubt, Aegis is talking rubbish. The meaning of "marginal" is not a matter of opinion - "marginal" has an entirely standard definition. Mr Osborne was simply guilty of an error; if enough chumps repeat it, it becomes a vulgar error.

happyandcontented

Some really interesting points thank you. If anyone has any more advice it would be well received. I trust the IFA but it is always useful to know the right questions to ask!

Aegis

kidmugsy wrote: »

P.S. In case of doubt, Aegis is talking rubbish. The meaning of "marginal" is not a matter of opinion - "marginal" has an entirely standard definition. Mr Osborne was simply guilty of an error; if enough chumps repeat it, it becomes a vulgar error.

Do feel free to actually demonstrate your point rather than simply asserting that I am talking rubbish. Given I work with accountants, solicitors and many other financial professionals and find that all use the term "marginal rate" as I do, I'll continue to do so rather than changing based on the ranting of an anonymous individual on the internet.

I'd pay 20% on the fraction of it that took my annual taxable income up to the threshold for 40% income tax, and 40% on the extra.

So the tax I'd pay would be neither my old marginal rate (20%) nor my new marginal rate (40%), but would be something in between 20% and 40%.

In fact you do pay tax at your old marginal rate of 20% and at your new marginal rate of 40%. The proportion of your income falling into your 20% band is taxed at 20%, the proportion falling into the 40% band is taxed at 40%. Any time an extra £1 of income is earned, you add it to your existing income and pay tax on that income at your highest marginal rate at that point, which is usually the same as your previous marginal rate but is higher if the additional £1 causes you to change tax brackets. You might also find yourself in an effective 60% bracket (or one of several other tax traps), but in such a position you actually pay 40% tax and lose some personal allowance (or other tax credits/benefits), which results in a higher effective tax rate.

If you paid tax at a single blended rate across all earnings, you would be correct in your terminology, but that's not how it works. Income is taxed sequentially, with each £1 of gross income first using up any remaining personal allowance and then being taxed at your highest marginal rate, with the rate changing at certain fixed points.

All in all, though, I think referring to me as "talking rubbish" is certainly not a valid criticism.

kidmugsy

If you work with accountants you will surely have heard them distinguish, for instance, "marginal costs" from "average costs". They are using "marginal" in just the way I explained; unsurprisingly, "marginal" means 'at the margin'. If in doubt, open any textbook on economics or on cost accountancy.


If you really think you should use "marginal" to mean 'a little bit of this and a little bit of that' do by all means try to explain. Be sure to demolish the definition "The marginal tax rate is the rate on the last dollar of income earned", as found here http://www.econlib.org/library/Enc/MarginalTaxRates.html

Or tell us why the Oxford Dictionary website is wrong when it gives:

(Of costs or benefits) relating to or resulting from small or unit changes

(Of taxation) relating to increases in income:
the marginal tax rates on these incomes rise to as much as 80 per cent in some republics.

jem16

Aegis wrote: »

All in all, though, I think referring to me as "talking rubbish" is certainly not a valid criticism.

Whilst I would not refer to you as talking rubbish, I have to agree with kidmusgy that you are using the term "marginal rate" wrongly with regards to how pension income is taxed.

State pension deferred lump sums are paid at your marginal rate of tax. Normal pension income is taxed just like normal earned income using marginal tax bands but not at your marginal rate.

EDIT:

Aegis wrote: »

Given I work with accountants, solicitors and many other financial professionals and find that all use the term "marginal rate" as I do,

I was quite surprised by this comment so thought I'd ask my brother, who is a Chartered Accountant of over 30 years experience, for his definition and use of marginal rate. His answer was;

"In simple terms, the tax rate an individual pays on one additional pound of income."

Asking him further he said it would not be correct to describe pension income as being taxed at your highest marginal rate (especially if you were due to pay tax at two or more different tax bands ) as your marginal tax rate can only be known after assessing all your income liable for tax. As the marginal tax rate is one single figure it would also be impossible if you ended up having to pay tax at 2 or more tax bands.

I'll continue to do so rather than changing based on the ranting of an anonymous individual on the internet.

Well I hope neither my brother nor I are ranting ( although we are anonymous ) but that it might lead you to rethink the usage? One would hope that the professionals are getting it correct as otherwise there's not much hope for the rest of us.

atush

The OH is a CA of many decades standing, and has agreed with Jem.

TH1878

I'm with Kidmugsy on this one but I think saying Aegis is talking rubbish overstepped the mark.

Non-savings income is calculated first before savings and dividend income. Pension income is classed as non-savings income for income tax purposes so it cannot be taxed at your marginal rate if you have any savings income or dividend income.

For example, someone receives a state pension of £10,600 and gross dividends of £31,785 (the basic rate tax band).

They then decide to start drawing a private pension of £31,785 pa. This would be taxed at 20% and not 40% as it is taxed before dividends. The dividends (rather than the pension) would be pushed into the higher rate tax band and the marginal rate will be 32.5% and not 40%

zygurat789

Leaving aside all the high powered technical opinion, the English language would be a good guide.
"Highest marginal rate" is being used as a way of describing income taxed at two different rates. One being singular and one being plural.
It just has to be wrong
If something is taxed at "the marginal rate" which is singular, then it just has to be one rate.

Aegis

kidmugsy wrote: »

If you work with accountants you will surely have heard them distinguish, for instance, "marginal costs" from "average costs". They are using "marginal" in just the way I explained; unsurprisingly, "marginal" means 'at the margin'. If in doubt, open any textbook on economics or on cost accountancy.


If you really think you should use "marginal" to mean 'a little bit of this and a little bit of that' do by all means try to explain. Be sure to demolish the definition "The marginal tax rate is the rate on the last dollar of income earned", as found here http://www.econlib.org/library/Enc/MarginalTaxRates.html

Or tell us why the Oxford Dictionary website is wrong when it gives:

(Of costs or benefits) relating to or resulting from small or unit changes

(Of taxation) relating to increases in income:
the marginal tax rates on these incomes rise to as much as 80 per cent in some republics.

I'm pretty sure I already explained what I mean by this in post 25. To give an example, if you were earning £5,000 below the higher rate threshold and received a payment from crystallised pension rights totalling £10,000 of taxable income, then you would pay tax at your (highest - I will admit that this word could be considered redundant, but I still do not believe that is any reason to accuse me of "talking rubbish") marginal rate for each of the 10,000 £1 payments that make up that £10,000 overall payment. For the first £5,000, that marginal rate will be 20%. For the next £5,000, the marginal rate will instead be 40%. Every single pound is taxed at your (highest) marginal rate at the time sequentially, therefore I do not consider it in the least bit problematic to refer to the entire income as being taxed at marginal rate. As indicated above, the word "highest" might be redundant, but there are plenty of redundant expressions in common usage.

jem16 wrote: »

Whilst I would not refer to you as talking rubbish, I have to agree with kidmusgy that you are using the term "marginal rate" wrongly with regards to how pension income is taxed.

I'm quite happy to debate this and learn, I just felt rather irritated at having everything I've contributed to this thread summed up as "talking rubbish" because someone didn't like one piece of terminology which is widely used and understood (irrespective of whether it is technically correct, which is of course the subject of this current debate).

State pension deferred lump sums are paid at your marginal rate of tax. Normal pension income is taxed just like normal earned income using marginal tax bands but not at your marginal rate.

Actually I would argue that this is incorrect. If you earned exactly £150,000 of gross income, your marginal rate of tax would be 45% (i.e. the next £1 of income would be taxed at 45%. In actual fact, you are taxed in this instance at the rate of tax on the last £1 of income received, which would be 40%. By the strictest definition, this is not the marginal rate of tax.

On the other hand, any income received at that point would be paid at your marginal rate of tax (45%).

I was quite surprised by this comment so thought I'd ask my brother, who is a Chartered Accountant of over 30 years experience, for his definition and use of marginal rate. His answer was;

"In simple terms, the tax rate an individual pays on one additional pound of income."

Asking him further he said it would not be correct to describe pension income as being taxed at your highest marginal rate (especially if you were due to pay tax at two or more different tax bands ) as your marginal tax rate can only be known after assessing all your income liable for tax. As the marginal tax rate is one single figure it would also be impossible if you ended up having to pay tax at 2 or more tax bands.

I actually don't disagree with him, and I think I expressed this above. My only real distinction is that I view income as collections of payments received rather than as a singular conglomerate. As such, when I say "at your marginal rate" I'm simply stating that each £1 payment making up that income is taxed at your marginal rate given all the payments which have gone before, which is definitional.

Well I hope neither my brother nor I are ranting ( although we are anonymous ) but that it might lead you to rethink the usage? One would hope that the professionals are getting it correct as otherwise there's not much hope for the rest of us.

I don't think that you are ranting, the rant was what started this discussion (which is now actually quite interesting). I was quite irritated when writing that post, as it seemed to be a deliberate derailing of a useful thread for very petty reasons, but hopefully the OP knows that he/she can still ask follow up questions and get answers, even if those answers differ slightly in terminology.

Addressing your point I have looked into it today and remain convinced that my usage is correct (if redundant at times) based on how I understand and describe the tax system working. If I wanted to be very pedantic, I could eliminate "highest" and express income as being taxed at your "marginal rate(s)", but that just looks clunky to me.

zygurat789 wrote: »

Leaving aside all the high powered technical opinion, the English language would be a good guide.
"Highest marginal rate" is being used as a way of describing income taxed at two different rates. One being singular and one being plural.
It just has to be wrong
If something is taxed at "the marginal rate" which is singular, then it just has to be one rate.

This isn't always the case. "I travelled to London at the speed limit" is perfectly valid, and you would rightly expect that the limit would change depending on where you are. A singular can describe multiple outcomes under some circumstances, and I believe this is one where it obviously must do so.