POLL - Should NI avoidance on pension contributions, via Salary Sacrifice, be stopped

MK62

Should be stopped

Yes......for BR taxpayers, 20% relief on the way in and 21% tax on the way out (factoring in 25% tax free).......
I suppose you could make the case for new contributions, which would presumably get 28% relief........but you'd be shafting current pensioners good and proper!

TheBanker

michaels said:

A lot of existing pension pots have already been subject to NI on the way on so you are proposing for many to charge NI on the same income twice.  For those who paid NI and saved basic rate tax on the way in, paying NI a second time and Basic rate on the way out would mean they had actually receive less from money that has gone through the pension than they would have got if they had simply taken it as income - so rather than a tax break for pension saving these lower income people would have suffered a tax penalty.

MK62 said:

Yes......for BR taxpayers, 20% relief on the way in and 21% tax on the way out (factoring in 25% tax free).......
I suppose you could make the case for new contributions, which would presumably get 28% relief........but you'd be shafting current pensioners good and proper!

Are these comments in response to my suggestion to scrap NI and replace it with a reformed version of income tax, payable by all?

If so I realise that people who are currently drawing their pensions would be adversley impacted, as would people who are actively saving for retirement. So if my proposal were to become reality (which it won't, for this and many other reasons) you would need to protect current pensioners, perhaps by leaving them on the old tax system. Transitional arrangements would be needed to ensure those who had made pension contributions net of NI did not loose out. 

hugheskevi

Should be left alone

TheBanker said:
Transitional arrangements would be needed to ensure those who had made pension contributions net of NI did not loose out. 

This is rather at the heart of the problem. In many areas of taxation and benefits, it is not difficult to design a superior system to that which exists, but selling the change to the people, overcoming the inevitable vested-interested lobbying, and then managing the change in an administratively deliverable way is the real challenge.

Transitional arrangements in pensions last a very long time - there are 16-year-olds today paying NI on pension contributions who will still be alive and drawing that pension 100 years from now.

Even if we look back at just the last 20 years, we have a lot of protections arising from policy change:

• Enhanced Protection 2006 (2006)
• Primary Protection 2006 (2006)
• Scheme Specific Lump Sum Protection (2006)
• Age 50 Minimum Pension age protection (2006/2010)
• Fixed Protection 2012
• Individual Protection 2014
• Fixed Protection 2014
• Protection of underpin of existing State Pension entitlement when calculating new State Pension starting entitlement, as well as other transitional protections such as inheritance of spouse State Pension (2016)
• Individual Protection 2016
• Fixed Protection 2016
• New State Pension Protected Amount (2016)
• Age 55 Minimum Pension age protection (2021)
• Transitional Tax-Free Amount Certificates (2024)

I might have forgotten a few, but that is plenty enough for Sir Humphrey to be proud - a new type of protection every couple of years, most lasting about half a lifetime.

I very much hope that if change is to be made, it is well-considered change, widely consulted upon, and introduced slowly. A key problem to overcome at the current time is that there is no money, which presents a big challenge to long-term reforms, as it is usually necessary to spend money if you want a simple, fair system.

Moonwolf

Should be left alone

TheBanker said:

michaels said:

A lot of existing pension pots have already been subject to NI on the way on so you are proposing for many to charge NI on the same income twice.  For those who paid NI and saved basic rate tax on the way in, paying NI a second time and Basic rate on the way out would mean they had actually receive less from money that has gone through the pension than they would have got if they had simply taken it as income - so rather than a tax break for pension saving these lower income people would have suffered a tax penalty.

MK62 said:

Yes......for BR taxpayers, 20% relief on the way in and 21% tax on the way out (factoring in 25% tax free).......
I suppose you could make the case for new contributions, which would presumably get 28% relief........but you'd be shafting current pensioners good and proper!

Are these comments in response to my suggestion to scrap NI and replace it with a reformed version of income tax, payable by all?

If so I realise that people who are currently drawing their pensions would be adversley impacted, as would people who are actively saving for retirement. So if my proposal were to become reality (which it won't, for this and many other reasons) you would need to protect current pensioners, perhaps by leaving them on the old tax system. Transitional arrangements would be needed to ensure those who had made pension contributions net of NI did not loose out. 

If you need to protect pensioners, how about just raising the personal tax thresholds for pensioners as a transitional/semi-permanent arrangement.

This would stop the new higher income tax hitting the poorer pensioners, they can be set at any level, I would be looking to ensure that no pensioner on less than the equivalent of average wage paid more tax. 

We have had additional personal allowances for pensioners before and if it is age based then I can't imagine it is too expensive to administer.

If the allowances are frozen it would make them transitional but I would hope they are treated with the same flexibility as current allowances.

It doesn't even cost any money if it is built into the calculation of the new tax rates.

Grumpy_chap

Moonwolf said:

If you need to protect pensioners, how about just raising the personal tax thresholds for pensioners

I would be looking to ensure that no pensioner on less than the equivalent of average wage paid more tax. 

That would be extraordinarily expensive and quite likely to result in inter-generational resentment.
An employee earning average wage will pay both Income Tax plus National Insurance.  Indeed, a full time employee on NMW will also incur these taxes.

Moonwolf

Should be left alone

Grumpy_chap said:

Moonwolf said:

If you need to protect pensioners, how about just raising the personal tax thresholds for pensioners

I would be looking to ensure that no pensioner on less than the equivalent of average wage paid more tax. 

That would be extraordinarily expensive and quite likely to result in inter-generational resentment.
An employee earning average wage will pay both Income Tax plus National Insurance.  Indeed, a full time employee on NMW will also incur these taxes.

I think you have misunderstood, it should be cost neutral and the way you mention NI suggests you have missed something.

I am responding to the suggestion of scrapping employees NI and rolling it into income tax, this would be simpler and on some measures this would be fairer because at the moment people who work for their income pay more tax than those that get a passive income.  As there would be more tax payers and the scaling for higher rate tax payers would not be the same, income tax would not go up as much as the removed NI for each person.  BOTE suggests perhaps 25% basic rate instead of 20% plus NI although it depends on a lot including the fact that the threshold is different for them both so where the new common threshold is.

@TheBanker covered some of the other stuff in his post.

The change would be around neutral for low and average earners.  

Pensioners and those with income primarily from investments would be paying more as they don't pay NI at the moment.

However, one problem would be that pensioners who are on a fixed income have no easy mechanism to increase their income to offset that effectively new tax.  So in this case giving pensioners an extra personal allowance would protect the poorer pensioners from the extra tax making the change neutral for them. The personal allowance could be at any level. This shouldn't cost.

MetaPhysical

Should be left alone

<snip>

I'd prefer not to work given the amount of tax burden on any income in the higher rate band, so plan to retire next year at the age of 47, not least due to the pension accrued from age 55.

Granted this is a nice position to be in, but that is beside the point. I will respond rationally to incentives, and those incentives are pushing me toward excessive pension contributions, not working, and early retirement.

We have the nonsensical position where anyone aged 55+ who is a higher rate taxpayer now but a future basic rate taxpayer can put money into a pension and get a 42% (85/60) uplift for funds accessible whenever they choose, and more with salary sacrifice.

I think people significantly underestimate the harm caused by tax systems that encourage the wrong behaviour.

I think this absolutely nails a fundamental problem in the British economy.  It is a tragedy and a disgrace that the UK tax system effectively encourages very skilled people that the economy is crying out for to go down this route, myself included.  

MK62

Should be stopped

Moonwolf said:

Grumpy_chap said:

Moonwolf said:

If you need to protect pensioners, how about just raising the personal tax thresholds for pensioners

I would be looking to ensure that no pensioner on less than the equivalent of average wage paid more tax. 

That would be extraordinarily expensive and quite likely to result in inter-generational resentment.
An employee earning average wage will pay both Income Tax plus National Insurance.  Indeed, a full time employee on NMW will also incur these taxes.

I think you have misunderstood, it should be cost neutral and the way you mention NI suggests you have missed something.

I am responding to the suggestion of scrapping employees NI and rolling it into income tax, this would be simpler and on some measures this would be fairer because at the moment people who work for their income pay more tax than those that get a passive income.  As there would be more tax payers and the scaling for higher rate tax payers would not be the same, income tax would not go up as much as the removed NI for each person.  BOTE suggests perhaps 25% basic rate instead of 20% plus NI although it depends on a lot including the fact that the threshold is different for them both so where the new common threshold is.

@TheBanker covered some of the other stuff in his post.

The change would be around neutral for low and average earners.  

Pensioners and those with income primarily from investments would be paying more as they don't pay NI at the moment.

However, one problem would be that pensioners who are on a fixed income have no easy mechanism to increase their income to offset that effectively new tax.  So in this case giving pensioners an extra personal allowance would protect the poorer pensioners from the extra tax making the change neutral for them. The personal allowance could be at any level. This shouldn't cost.

How can it be neutral though?........presumably nobody under 67 would get this new higher personal allowance, so current early retirees (anyone currently between 55-66 who is retired and living off pension income in excess of the standard PA) would get hammered........if everyone over 55 is given this new higher PA, that would hardly be fair to younger workers, and would be expensive for govt.......

Moonwolf

Should be left alone

MK62 said:

How can it be neutral though?........presumably nobody under 67 would get this new higher personal allowance, so current early retirees (anyone currently between 55-66 who is retired and living off pension income in excess of the standard PA) would get hammered........if everyone over 55 is given this new higher PA, that would hardly be fair to younger workers, and would be expensive for govt.......

I said it would be neutral for earners,  It wouldn't be neutral for those under pension age taking income that is currently classed as unearned income.

It would even interfere with my plans to retire early. Potentially, at 25p in the £ instead of 20p, with current allowances and my current drawdown strategy I would pay £1,400 extra in tax a year.  It might even mean I had to either get a couple of short term higher paid IT contracting jobs or a longer term lower paid lower responsibility job. Even over 67 would pay more with my suggestion as my pension income should be above average.

I'm not necessarily a fan from a personal perspective but it feels logical and even fairer to me than the current system where the rich can avoid tax and potentially NI on the way in and pay lower tax on the way out or the very rich living entirely on income from inherited investments pay less tax than people who actually work.

MK62

Should be stopped

Moonwolf said:

MK62 said:

How can it be neutral though?........presumably nobody under 67 would get this new higher personal allowance, so current early retirees (anyone currently between 55-66 who is retired and living off pension income in excess of the standard PA) would get hammered........if everyone over 55 is given this new higher PA, that would hardly be fair to younger workers, and would be expensive for govt.......

I said it would be neutral for earners,  It wouldn't be neutral for those under pension age taking income that is currently classed as unearned income.

It would even interfere with my plans to retire early. Potentially, at 25p in the £ instead of 20p, with current allowances and my current drawdown strategy I would pay £1,400 extra in tax a year.  It might even mean I had to either get a couple of short term higher paid IT contracting jobs or a longer term lower paid lower responsibility job. Even over 67 would pay more with my suggestion as my pension income should be above average.

I'm not necessarily a fan from a personal perspective but it feels logical and even fairer to me than the current system where the rich can avoid tax and potentially NI on the way in and pay lower tax on the way out or the very rich living entirely on income from inherited investments pay less tax than people who actually work.

I agree with you on the last paragraph, but can't agree that hammering current early retirees is the way to go about tackling that issue.
Someone who took early retirement a few years ago, is already being hit by fiscal drag.......whacking such people with a further 5-8% on their marginal rate might well tip many over the edge......
Also, many people have already paid NI on their pension contributions........effectively charging it again on their pension income, ie double taxation, hardly seems fair........and it would be extremely complicated (and maybe impossible) to identify which contributions were NI paid, and which were not, over everyone's career.
If stopping the "rich" avoiding NI on pension contributions (ie on the way in) is the aim, then the solution is surely to stop that, or else make everyone's pension contributions NI free (though that's highly unlikely to be a viable option at this time).
Personally I think the fairest solution is either everyone pays NI on their pension contributions, or nobody does......getting there though is not straightforward, as many of the posts in this thread have illustrated.

As to the very rich living entirely off investment income and paying less tax than workers, I also agree there (at least in principle)......but that is also a tricky one, as the very rich often have access to avoidance methods unavailable to the average worker (the most obvious being to simply do one abroad).