Tax Free Lump Sum and 2025 Budget

Cobbler_tone

If they added a penny to every tax band, along with extending the freeze they’d raise a lot of tax. My spreadsheet has broken though.
As for breaking promises, show me a government who hasn’t.

Albermarle

Bookle said:

From the Telegraph today. Any merit or weight on recommendations from Fabian society?

"A pressure group of which Rachel Reeves is a member has urged her to cut the tax-free pension lump sum to £100,000.

At present, most savers can take 25pc of their pension pot tax-free once they reach the age of 55, up to a maximum of £268,275.

However, the Fabian Society, a prominent Labour-associated think tank, has suggested cutting the allowance by two-thirds at the Budget on Nov 26 in an attempt to raise £2bn"

From the Telegraph commentating on a left wing group.

Best ignored.

hugheskevi

It is worth remembering the other salary-related reductions some face, in particular Student Loan repayments and Child Benefit reduction.

Taking someone who:

• Started university between 2012 - 2022 and is paying off a Student Loan
• Has 2 children
• Makes statutory minimum pension contributions
• Is in a net-pay pension scheme

Then their marginal and average deduction rates look like this. They face deductions from gross salary in excess of 40% on almost all income over £28,500 and deductons over 50% on all income over £52,500.

With an income of £10,000+ they are automatically enrolled and make pension contributions (5% employee contributions on earnings above £6,240)

At slightly above £12,570 they start to pay basic rate income tax (20%) and National Insurance (8%) - slightly above as their small pension contributions mean income tax kicks in just above the Personal Allowance.

At £28,470 they start to repay Student Loan, at 9% of income above that amount. Taken along with pension contributions, income tax and national insurance they now have a reduction of 41% of additional income earned.

There is some brief respite at just over £50,000 when due to pension contributions, they pay 20% income tax and 2% national insurance on a small range of income, along with their Student Loan (9%).

But at £52,500 they face higher rate tax (40%), national insurance (2%), student loan (9%) but at least pension contributions have stopped (due to the assumed statutory minimum contribution and the effect of banded contributions).

Things get worse at £62,500 as Child Benefit starts to be withdrawn, resulting in a marginal deduction rate above 60%.

More respite comes at £82,500 as Child Benefit is fully withdrawn and they drop back down to a marginal reduction rate of 51%

At £100,000 of income they face withdrawal of free childcare, then at £102,500 they get hit with higher rate tax (40%), withdrawal of personal allowance (20%), Student loan (9%) and national insurance (2%) driving the marginal deduction rate over 70%. 

At £127,500 the marginal deduction rate reduces to 56% (additional rate tax 45%, national insurance 2% and student loan repayment 9%).

Note I've ignored means-tested benefits such as Universal Credit and Council Tax Reduction here, they have the effect of significantly increasing marginal deduction rates at the lower end, with Universal Credit having a 55% taper rate. There is also no account taken of employer national insurance contributions or employer pension contributions.

kinger101

hugheskevi said:

It is worth remembering the other salary-related reductions some face, in particular Student Loan repayments and Child Benefit reduction.

Taking someone who:

• Started university between 2012 - 2022 and is paying off a Student Loan
• Has 2 children
• Makes statutory minimum pension contributions
• Is in a net-pay pension scheme

Then their marginal and average deduction rates look like this. They face deductions from gross salary in excess of 40% on almost all income over £28,500 and deductons over 50% on all income over £52,500.

With an income of £10,000+ they are automatically enrolled and make pension contributions (5% employee contributions on earnings above £6,240)

At slightly above £12,570 they start to pay basic rate income tax (20%) and National Insurance (8%) - slightly above as their small pension contributions mean income tax kicks in just above the Personal Allowance.

At £28,470 they start to repay Student Loan, at 9% of income above that amount. Taken along with pension contributions, income tax and national insurance they now have a reduction of 41% of additional income earned.

There is some brief respite at just over £50,000 when due to pension contributions, they pay 20% income tax and 2% national insurance on a small range of income, along with their Student Loan (9%).

But at £52,500 they face higher rate tax (40%), national insurance (2%), student loan (9%) but at least pension contributions have stopped (due to the assumed statutory minimum contribution and the effect of banded contributions).

Things get worse at £62,500 as Child Benefit starts to be withdrawn, resulting in a marginal deduction rate above 60%.

More respite comes at £82,500 as Child Benefit is fully withdrawn and they drop back down to a marginal reduction rate of 51%

At £100,000 of income they face withdrawal of free childcare, then at £102,500 they get hit with higher rate tax (40%), withdrawal of personal allowance (20%), Student loan (9%) and national insurance (2%) driving the marginal deduction rate over 70%. 

At £127,500 the marginal deduction rate reduces to 56% (additional rate tax 45%, national insurance 2% and student loan repayment 9%).

Note I've ignored means-tested benefits such as Universal Credit and Council Tax Reduction here, they have the effect of significantly increasing marginal deduction rates at the lower end, with Universal Credit having a 55% taper rate. There is also no account taken of employer national insurance contributions or employer pension contributions.

The loss of the childcare is particularly hideous.  Wouldn't want to be making up the shortfall out of pay that had already been taxed at 60 percent.  Nursery care is still expensive with the free hours.

michaels

Personally I would move the 45% band to 85k and get rid of the personal allowance withdrawal.

Grumpy_chap

hugheskevi said:

Taking someone who:

• Started university between 2012 - 2022 and is paying off a Student Loan
• Has 2 children
• Makes statutory minimum pension contributions
• Is in a net-pay pension scheme

 

The deductions for pension are somewhat different in that this money is invested for the future benefit of the individual.

Pension contributions are also unusual as increasing pension contributions can reduce the other deductions.

hugheskevi

Grumpy_chap said:

hugheskevi said:

Taking someone who:

• Started university between 2012 - 2022 and is paying off a Student Loan
• Has 2 children
• Makes statutory minimum pension contributions
• Is in a net-pay pension scheme

 

The deductions for pension are somewhat different in that this money is invested for the future benefit of the individual.

Pension contributions are also unusual as increasing pension contributions can reduce the other deductions.

Aye, pension contributions are awkward, and also employer pension contributions are difficult to take into account in a satisfactory way. Pensions also attract tax later in life when paid, albeit at a lower rate and that is very difficult to anticipate. I decided to present the chart on a default basis including statutory minimum pensions, as most folks view take-home pay without really appreciating how it all came about. You could also just exclude pension contributions entirely, which wouldn't be unreasonable..

ukdw

michaels said:

Personally I would move the 45% band to 85k and get rid of the personal allowance withdrawal.

Personally I would go a lot further.
1. I would merge employee and employer NI into income tax - with salaries rising.
2. I would lower the tax free allowance down a bit to the current employee NI starting rate.
3. I would introduce a new tax band starting about £40k - which is more than the current 20%+8%+15% band, but less than the 40%+2%+15% band.
- maybe 30%+8%+15%
4. I would run the new band to about £80k
5. I would then have one band only above this at 40%+8%+15% and remove the loss of tax free (60%+2%+15%) band.  
6. For pension tax relief I would make it a flat figure - maybe around 50%
7. Remove the PCLS tax free facility - balancing out by the 50% tax relief figure.
8. Would probably lower the IHT rate down a bit, but remove most of the gift allowances - but maybe have a slightly lower rate for gifts.  Would also remove the residence nil rate band.
9. Would remove the below 75 pension tax free feature.
10. I would equalise dividend and cgt rates to the same levels and income tax - but with an inflation allowance.
11. I would simplify ISAs and probably lower the limits.


Hopefully simplifying and lowering rates would be balanced out by removing of allowances and increasing incentives - so overall tax take should increase.

OldScientist

LHW99 said:

Qyburn said:

LHW99 said:

Not that many in the media picked up on Gordon Brown's cutting of dividend credits to pension funds.

I remember a bunch of publicity, terming it a "raid" on pensions. Plenty still ongoing if you search for "gordon brown pension raid"

Now yes, but at the time plenty in the media about how it was a good move and wouldn't cause many problems. Very few took a longer term view, particularly in the popular press, hence little public reaction at the time.

You might be interested in calculations of the effect on pensions on the change in dividend tax credits at (roughly 12% of the fund value over the lifetime of a pension)

https://www.civitas.org.uk/2011/10/03/how-big-was-gordon-browns-raid-on-pensions/

and a measured review of the changes (the rationale behind the changes is less well known)

https://www.pensionspolicyinstitute.org.uk/media/a55nnloy/200506-bn22-is-5bn-being-taken-every-year-from-pension-funds.pdf
 
By far and away the largest effects, at least on DB pensions, were increased longevity and the fall in interest rates from 1980 to 2020.

michaels

ukdw said:

michaels said:

Personally I would move the 45% band to 85k and get rid of the personal allowance withdrawal.

Personally I would go a lot further.
1. I would merge employee and employer NI into income tax - with salaries rising.
2. I would lower the tax free allowance down a bit to the current employee NI starting rate.
3. I would introduce a new tax band starting about £40k - which is more than the current 20%+8%+15% band, but less than the 40%+2%+15% band.
- maybe 30%+8%+15%
4. I would run the new band to about £80k
5. I would then have one band only above this at 40%+8%+15% and remove the loss of tax free (60%+2%+15%) band.  
6. For pension tax relief I would make it a flat figure - maybe around 50%
7. Remove the PCLS tax free facility - balancing out by the 50% tax relief figure.
8. Would probably lower the IHT rate down a bit, but remove most of the gift allowances - but maybe have a slightly lower rate for gifts.  Would also remove the residence nil rate band.
9. Would remove the below 75 pension tax free feature.
10. I would equalise dividend and cgt rates to the same levels and income tax - but with an inflation allowance.
11. I would simplify ISAs and probably lower the limits.


Hopefully simplifying and lowering rates would be balanced out by removing of allowances and increasing incentives - so overall tax take should increase.

Mostly agree but I think there are transitional issues with for example those who have paid more tax/NI on the way into their pensions who would then be double taxed on the way out.

One thought I had is that we should get rid of the personal allowance and instead give every citizen (including children) the 2.5k of tax saving (with an equal deduction from benefits)