TAX ON FULL STATE PENSION APRIL 2027

QrizB

Grumpy_chap said:

QrizB said:

you could "simply" reduce all pension payments by 20% and declare that the state pension is now tax-free. 

Would that only be on SP, or on ALL pension payments?  

Just SP.

dunstonh said:

QrizB said:

MeteredOut said:

Triumph13 said:

... to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or us the individual own tax code?

Putting on my 😈 head for a minute, you could "simply" reduce all pension payments by 20% and declare that the state pension is now tax-free. Anyone whose total income is now less than the Pension Credit threshold will be able to get topped back up.

Simples!

What about those that are earning £20k a year on a state pension?

They'd be cut to £16k, which would be paid tax-free.

(You did see the "mischievous demon" emoji, didn't you?)

Triumph13

MeteredOut said:

Triumph13 said:

If the full state pension is to rise above the personal allowance - and there is no innate reason why it shouldn't - then they really need to bite the bullet and deduct that tax up front to avoid the issue of millions of pensioners with tiny tax bills.  It should be relatively simple to add an extra field to the DWP systems, to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.  It's also a minor change to HMRC systems to take account of the tax already 'paid' on the reported state pension number.

Of course, as it's govt IT systems we're talking about, it will probably take ten times longer than it should, so they may need to just write off all the tiny tax bills for a year or two.

You are grossly underestimating the complexity in such a change, both for pension payments, and for HMRC.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or use the individual's own tax code? If the former, then its already wrong for a significant number of people (a quick google suggests 30-35% of those receiving state mention are not on the standard PA). If the latter, its already more complex. What about the 19% rate in Scotland? Wrong for those. What about those who's tax code change during the year due to them updating their interest/divident forecasts on their personal tax accounts? Wrong for those, so the calculation then needs to take into account what has already been tax - effectively building tax collection rules into the pensions payments system.

That's why I said the PA not the tax code.  If you did try and bring in tax codes it would indeed be a huge change.  Instead you would continue to treat the state pension below PA as paid gross, exactly as it is now, with all remaining tax collected from other income sources.  The only change would be to collect tax on the portion of SP above the full PA via a reduction in the SP.

You are right, however, that Scotland majes it very slightly more complex.

MeteredOut

Triumph13 said:

MeteredOut said:

Triumph13 said:

If the full state pension is to rise above the personal allowance - and there is no innate reason why it shouldn't - then they really need to bite the bullet and deduct that tax up front to avoid the issue of millions of pensioners with tiny tax bills.  It should be relatively simple to add an extra field to the DWP systems, to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.  It's also a minor change to HMRC systems to take account of the tax already 'paid' on the reported state pension number.

Of course, as it's govt IT systems we're talking about, it will probably take ten times longer than it should, so they may need to just write off all the tiny tax bills for a year or two.

You are grossly underestimating the complexity in such a change, both for pension payments, and for HMRC.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or use the individual's own tax code? If the former, then its already wrong for a significant number of people (a quick google suggests 30-35% of those receiving state mention are not on the standard PA). If the latter, its already more complex. What about the 19% rate in Scotland? Wrong for those. What about those who's tax code change during the year due to them updating their interest/divident forecasts on their personal tax accounts? Wrong for those, so the calculation then needs to take into account what has already been tax - effectively building tax collection rules into the pensions payments system.

That's why I said the PA not the tax code.  If you did try and bring in tax codes it would indeed be a huge change.  Instead you would continue to treat the state pension below PA as paid gross, exactly as it is now, with all remaining tax collected from other income sources.  The only change would be to collect tax on the portion of SP above the full PA via a reduction in the SP.

You are right, however, that Scotland majes it very slightly more complex.

That would still not be a "relatively simple change". They can't just take 20% off and not then build an integration from the payments system to the tax system in order to record that tax as having been paid. It would be a significant change.

LHW99

MeteredOut said:

Triumph13 said:

MeteredOut said:

Triumph13 said:

If the full state pension is to rise above the personal allowance - and there is no innate reason why it shouldn't - then they really need to bite the bullet and deduct that tax up front to avoid the issue of millions of pensioners with tiny tax bills.  It should be relatively simple to add an extra field to the DWP systems, to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.  It's also a minor change to HMRC systems to take account of the tax already 'paid' on the reported state pension number.

Of course, as it's govt IT systems we're talking about, it will probably take ten times longer than it should, so they may need to just write off all the tiny tax bills for a year or two.

You are grossly underestimating the complexity in such a change, both for pension payments, and for HMRC.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or use the individual's own tax code? If the former, then its already wrong for a significant number of people (a quick google suggests 30-35% of those receiving state mention are not on the standard PA). If the latter, its already more complex. What about the 19% rate in Scotland? Wrong for those. What about those who's tax code change during the year due to them updating their interest/divident forecasts on their personal tax accounts? Wrong for those, so the calculation then needs to take into account what has already been tax - effectively building tax collection rules into the pensions payments system.

That's why I said the PA not the tax code.  If you did try and bring in tax codes it would indeed be a huge change.  Instead you would continue to treat the state pension below PA as paid gross, exactly as it is now, with all remaining tax collected from other income sources.  The only change would be to collect tax on the portion of SP above the full PA via a reduction in the SP.

You are right, however, that Scotland majes it very slightly more complex.

That would still not be a "relatively simple change". They can't just take 20% off and not then build an integration from the payments system to the tax system in order to record that tax as having been paid. It would be a significant change.

Maybe they could integrate HMRC & DWP.....no more of one hand not knowing what the other is doing, a single working system, SP and other pensions dealt with in one place ........ what could possibly go wrong

MeteredOut

LHW99 said:

MeteredOut said:

Triumph13 said:

MeteredOut said:

Triumph13 said:

If the full state pension is to rise above the personal allowance - and there is no innate reason why it shouldn't - then they really need to bite the bullet and deduct that tax up front to avoid the issue of millions of pensioners with tiny tax bills.  It should be relatively simple to add an extra field to the DWP systems, to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.  It's also a minor change to HMRC systems to take account of the tax already 'paid' on the reported state pension number.

Of course, as it's govt IT systems we're talking about, it will probably take ten times longer than it should, so they may need to just write off all the tiny tax bills for a year or two.

You are grossly underestimating the complexity in such a change, both for pension payments, and for HMRC.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or use the individual's own tax code? If the former, then its already wrong for a significant number of people (a quick google suggests 30-35% of those receiving state mention are not on the standard PA). If the latter, its already more complex. What about the 19% rate in Scotland? Wrong for those. What about those who's tax code change during the year due to them updating their interest/divident forecasts on their personal tax accounts? Wrong for those, so the calculation then needs to take into account what has already been tax - effectively building tax collection rules into the pensions payments system.

That's why I said the PA not the tax code.  If you did try and bring in tax codes it would indeed be a huge change.  Instead you would continue to treat the state pension below PA as paid gross, exactly as it is now, with all remaining tax collected from other income sources.  The only change would be to collect tax on the portion of SP above the full PA via a reduction in the SP.

You are right, however, that Scotland majes it very slightly more complex.

That would still not be a "relatively simple change". They can't just take 20% off and not then build an integration from the payments system to the tax system in order to record that tax as having been paid. It would be a significant change.

Maybe they could integrate HMRC & DWP.....no more of one hand not knowing what the other is doing, a single working system, SP and other pensions dealt with in one place ........ what could possibly go wrong

Yes they could. But that would not be a "relatively simple change".

MetaPhysical

I watched an interview with Art Laffer. What a great guy and so articulate.  To go a large way to correct the distorted and perverse mess of the UK's income tax system that disincentives going to work for those not in work and causes people, our brightest and best amongst them to take less work or even retire when near certain benefit and PA thresholds and tapers his suggestion is a dramatically simpler system; all round, three easily understood bands; a lower rate, a middle rate and a higher rate.  and, controversially, no allowances and no NI.  He didn't give the rates and thresholds, that calculation the government would need to do.,

Everyone, billionaire or tea boy pays a new combined Income tax above age 18 from the first pound earned.  You pay, say, X% on everything up to the middle threshold of say A.  You then pay a higher Y% on everything above that until you get to the additional threshold, B.   You then pay an even higher Z% on everything above that.  Importantly, no tapers, cliff edges, PA withdrawals or allowances. 

People above SPA who have retired and have no way to go back to work and earn are exempt from Income tax completely until a certain number - he didn't give the number.  All benefits are means tested against the national minimum wage.  No one gets more benefits that push them above the NMW.  The bin man working hard doesn't and so benefits claimants shouldn't, no matter how many kids they have - that's a lifestyle choice you make and not the business of the tax payer to support.  If that's hard on you then tough - study more or improve your lot in life.  Tough talking and politically hard to implement I'm sure because of  people who will - rightly - say I've paid in my NI contributions all my life for my pension!  Desperate times call for desperate measures.  I think most people could stomach this if the rules were applied equally to everyone.  

Laffer says this is the only way to get the economy moving with a clear-to-understand income tax system that doesn't penalise work when crossing thresholds and incentivises people to work.

ClashCityRocker1

So having kids is a "lifestyle choice"? Even if that were so, it wasn't a choice made by the kids themselves was it? 

As my daughter says. "I didn't ask to be born".

MetaPhysical

ClashCityRocker1 said:

So having kids is a "lifestyle choice"? Even if that were so, it wasn't a choice made by the kids themselves was it? 

As my daughter says. "I didn't ask to be born".

I'm not necessarily agreeing but that's what was said, my daughters would say the same as yours.  I don't want to get political but that's the Yanks for you, a different way of looking at the world and you look after yourself other than a very basic safety net.  No lifestyle choice of a life on benefits there and having the state pay for your kids, whether they asked to be born or not.

Triumph13

MeteredOut said:

Triumph13 said:

MeteredOut said:

Triumph13 said:

If the full state pension is to rise above the personal allowance - and there is no innate reason why it shouldn't - then they really need to bite the bullet and deduct that tax up front to avoid the issue of millions of pensioners with tiny tax bills.  It should be relatively simple to add an extra field to the DWP systems, to deduct 20% of the excess of state pension over PA, and make payments based on that amount instead.  It's also a minor change to HMRC systems to take account of the tax already 'paid' on the reported state pension number.

Of course, as it's govt IT systems we're talking about, it will probably take ten times longer than it should, so they may need to just write off all the tiny tax bills for a year or two.

You are grossly underestimating the complexity in such a change, both for pension payments, and for HMRC.

For example, which PA do you deduct 20% over? Do you assume £12,570 (or whatever it happens to be that year) for everyone, or use the individual's own tax code? If the former, then its already wrong for a significant number of people (a quick google suggests 30-35% of those receiving state mention are not on the standard PA). If the latter, its already more complex. What about the 19% rate in Scotland? Wrong for those. What about those who's tax code change during the year due to them updating their interest/divident forecasts on their personal tax accounts? Wrong for those, so the calculation then needs to take into account what has already been tax - effectively building tax collection rules into the pensions payments system.

That's why I said the PA not the tax code.  If you did try and bring in tax codes it would indeed be a huge change.  Instead you would continue to treat the state pension below PA as paid gross, exactly as it is now, with all remaining tax collected from other income sources.  The only change would be to collect tax on the portion of SP above the full PA via a reduction in the SP.

You are right, however, that Scotland majes it very slightly more complex.

That would still not be a "relatively simple change". They can't just take 20% off and not then build an integration from the payments system to the tax system in order to record that tax as having been paid. It would be a significant change.

Not the way I'm suggesting. You just need to pass the pension amount over to HMRC in exactly the way you do now, and as long as everyone's clear whether that is net or gross it's very easy for HMRC to back calculate any tax already deducted.

This is the kind of thing I used to for for a living, working out how to tweak processes without rebuilding the whole architecture.

Grumpy_chap

LHW99 said:

Maybe they could integrate HMRC & DWP.....no more of one hand not knowing what the other is doing, a single working system, SP and other pensions dealt with in one place ........ what could possibly go wrong

That would not be a simple change.  It would impact much further than just pensions.

MetaPhysical said:

People above SPA who have retired and have no way to go back to work and earn are exempt from Income tax completely until a certain number 

What would define "retired and no way to go back to work"?

My FiL just turned 80 and finally gave up work.  He was earning and drawing pension.  He has previously retired and stopped working but then took a voluntary role which grew to an employed role.

I agree with the basic concept of simplifying the tax and benefits system (to work together coherently), eliminate the cliff edges but, against that concept, a personal allowance just for a difficult to define cohort is a complexity too far.