Abolished N.I - state pension system

hugheskevi

owl456 said:

michaels said:

I paid ni on the money that went into my pension and will pay tax on all but 25% on the way out (actually given the commutation rate on my pension I will probably pay tax on all of it on the way out) giving me a 5% pension saving bonus over an ISA.

If you add say 12% ni to be paid on the way out as well then saving via a pension will be worse than using an ISA and possibly worse than using a general savings account. This is effectively retrospective double taxation of pension savings as the ni is paid twice on the same income!

I fully agree with you on this, and it's a point that I don't think is made often enough. It's similar to complaints about how people don't pay NI on income from pensions today: the reason is because they already paid NI on it in the first place before it went into the pension pot!

I know there is an argument that says some people can now pay into a pension via salary sacrifice so they won't have paid NI in the first place. But not all employers allow that. Self-employed people don't get that luxury. And even those who do pay in via salary sacrifice now probably haven't done so for their whole lives.

I don't see how you untangle this mess without seriously upsetting at least one of the different groups I mentioned in the last paragraph. Ideally there'd be some way of distinguishing which contributions to a pension had already paid NI and which hadn't, but I can't see how you can retrospectively determine this.

Perhaps if NI were to be completely folded into income tax, we'd have to draw a line under existing pension savings, let them keep existing tax rates, and then give everybody an entirely new, separate, pot, to which the new rules are applied?

Folding NI into income tax is already happening - in 2022 the basic rate of income tax was to fall to 19% in 2024 and the political ambition was for a basic rate of income tax of 16% by 2029. Instead, income tax rates are unchanged and the income tax salary thresholds are significantly lower in real terms whilst National Insurance is lower.

The political ambition now is to abolish NI in the long-term. If a Labour administration shares a similar ambition, then the shortfall of revenue from NI abolition would have to come wholly or mostly from either more VAT and/or higher income tax - there will be limited scope from other taxes to make up such a large loss of revenue.

There would be no need to draw any lines around past pension accrual, just progressively lower employee NI rates, maybe over an 8 year period of 1 percentage point reductions each year, whilst keeping income tax thresholds frozen or having below inflation increases (or claw back increases to Personal Allowance from the basic rate band as was done in the early 2010s), and maybe increase income tax rates and/or VAT rate by whatever is necessary to balance the books - although the power of fiscal drag may mean that no increases are necessary, depending on price and wage inflation.

Of course, a Labour administration may not share a similar ambition. Even this NI cut puts them in a difficult position, because if they had opposed it they would then be portrayed as the anti-worker, high-tax party, but supporting it means that they need to make £10bn of tax increases, spending reductions, or additional borrowing to their financial policies. Given the difficulties they face around cutting their £28bn Green Investment pledge, making changes to their spending plans exposes them to accusations of U-turns, whilst proposing higher taxes or borrowing exposes them to the usual political attacks.

Eldi_Dos

When I go into my HMRC account occasionally to check my pension payments, there are three columns,one of which is NI and reads 0 every month.
The system is already in place if NI is to be deducted from pension payments, whether there is a will to use it is another matter.

zagfles

hugheskevi said:

owl456 said:

michaels said:

I paid ni on the money that went into my pension and will pay tax on all but 25% on the way out (actually given the commutation rate on my pension I will probably pay tax on all of it on the way out) giving me a 5% pension saving bonus over an ISA.

If you add say 12% ni to be paid on the way out as well then saving via a pension will be worse than using an ISA and possibly worse than using a general savings account. This is effectively retrospective double taxation of pension savings as the ni is paid twice on the same income!

I fully agree with you on this, and it's a point that I don't think is made often enough. It's similar to complaints about how people don't pay NI on income from pensions today: the reason is because they already paid NI on it in the first place before it went into the pension pot!

I know there is an argument that says some people can now pay into a pension via salary sacrifice so they won't have paid NI in the first place. But not all employers allow that. Self-employed people don't get that luxury. And even those who do pay in via salary sacrifice now probably haven't done so for their whole lives.

I don't see how you untangle this mess without seriously upsetting at least one of the different groups I mentioned in the last paragraph. Ideally there'd be some way of distinguishing which contributions to a pension had already paid NI and which hadn't, but I can't see how you can retrospectively determine this.

Perhaps if NI were to be completely folded into income tax, we'd have to draw a line under existing pension savings, let them keep existing tax rates, and then give everybody an entirely new, separate, pot, to which the new rules are applied?

Folding NI into income tax is already happening - in 2022 the basic rate of income tax was to fall to 19% in 2024 and the political ambition was for a basic rate of income tax of 16% by 2029. Instead, income tax rates are unchanged and the income tax salary thresholds are significantly lower in real terms whilst National Insurance is lower.

The political ambition now is to abolish NI in the long-term. If a Labour administration shares a similar ambition, then the shortfall of revenue from NI abolition would have to come wholly or mostly from either more VAT and/or higher income tax - there will be limited scope from other taxes to make up such a large loss of revenue.

There would be no need to draw any lines around past pension accrual, just progressively lower employee NI rates, maybe over an 8 year period of 1 percentage point reductions each year, whilst keeping income tax thresholds frozen or having below inflation increases (or claw back increases to Personal Allowance from the basic rate band as was done in the early 2010s), and maybe increase income tax rates and/or VAT rate by whatever is necessary to balance the books - although the power of fiscal drag may mean that no increases are necessary, depending on price and wage inflation.

Of course, a Labour administration may not share a similar ambition. Even this NI cut puts them in a difficult position, because if they had opposed it they would then be portrayed as the anti-worker, high-tax party, but supporting it means that they need to make £10bn of tax increases, spending reductions, or additional borrowing to their financial policies. Given the difficulties they face around cutting their £28bn Green Investment pledge, making changes to their spending plans exposes them to accusations of U-turns, whilst proposing higher taxes or borrowing exposes them to the usual political attacks.

It seems Labour are on the same page re tax cuts for workers and increases elsewhere. Despite all the hot air there's probably little difference between the main parties.

Pure speculation but one thing they could do is reintroduce a higher tax allowance for people over SPA, that way they could freeze the PA while reducing NI, so workers benefit from the NI cut though tempered by the PA freeze, and pensioners are protected from fiscal drag by the higher allowance. That way it'd hit people below SPA without earned income, eg early retirees, people living off investment income etc, who are exactly the people they'll want to encourage to work. 

zagfles

Eldi_Dos said:

When I go into my HMRC account occasionally to check my pension payments, there are three columns,one of which is NI and reads 0 every month.
The system is already in place if NI is to be deducted from pension payments, whether there is a will to use it is another matter.

Just because there's a column in the generic PAYE output you think the system is in place? How do you think it'd work? It might be fairly easy for non flexible DB pensions, but for drawdown pensions it'd be too easy to avoid or minimise. Someone who takes an annual UFPLS would pay far less NI than someone who takes regular monthly income. Someone with 2 drawdown pensions would pay less NI than someone with 1.

If someone had a drawdown pension they were drawing £2000 a month from, they'd pay £76 a month NI if standard class 1 was applied. If they instead had 2 drawdown pensions paying £1000 a month each, they'd pay zero NI. The latter would be easy enough to arrange. 

NI works on an individual job basis and on a pay period basis. It's not like tax which is assessed on total taxable income from all sources combined. And how would contributory benefits which are based on NI record work? It could be done in a sensible way, but it'd need a complete revamp of how NI works. So the PAYE system is definitely not "in place" to do it.  

Eldi_Dos

I do not really have to think about how it would work, I leave that to the people who are paid to make it work.

zagfles

Eldi_Dos said:

I do not really have to think about how it would work, I leave that to the people who are paid to make it work.

So why did you claim the "system is already in place if NI is to be deducted from pension payments" if you've not even thought about how it'd work? 

Qyburn

At the mome t you pay NI on emplyment earnings until you reach State Pension age, but not after that. What would be wrong with treating pension income the same way?

zagfles

Qyburn said:

At the mome t you pay NI on emplyment earnings until you reach State Pension age, but not after that. What would be wrong with treating pension income the same way?

Because it'd be far too complicated too do it in a fair way, see above. Also if people are paying NI they'd expect the benefits of NI. Could a pension be used to build entitlement to the state pension, or unemployment benefit etc. 

Qyburn

zagfles said:

Could a pension be used to build entitlement to the state pension, or unemployment benefit etc. 

Why not?   

LHW99

Qyburn said:

zagfles said:

Could a pension be used to build entitlement to the state pension, or unemployment benefit etc. 

Why not?   

Or NI on pensions could be earmarked to help fund nursing care for the elderly? Its extremely difficult to access NHS continuing care, even for those where most reasonable people would consider it an obvious thing to do, probably (at least in part) because budgets are tight.