UK Has Gone To Hell...

... is a commenter over at The Guardian who understands the maths of all this better than most. I have cut and pasted his last comment wholesale (subject to correcting a couple of typo's), all of which slots in neatly with the MW reform manifesto:

I linked to this blog post a few days back in relation to welfare reform.

The same system could work for pensions & pensioner benefits as well. You've hit the nail square on the head by mentioning that the State pension is indeed taxable. The manner in which this is dealt with by the tax office is to reduce the tax free personal allowance by the pension amount.

Now if we were to roll up all of these benefits & the basic state pension (plus a little bit more because it's ridiculously low at present) to a single payment of £150/week (or £7,800 a year) and reduce the tax free personal allowance by this much (next year £7,475) [this would give] a negative code (or K Code as they are known).

This code is then given to any personal pension providers to deduct tax at source. When operating a K code a maximum of 50% can be deducted. The only real tweaks needed would be to change the tax system itself to contain this universal taper rule. Tax payable in any given year would be the lower of [non-state income + state pension* x tax rate] OR [non-state income x 50%].

This basically adds in an element of means testing to universal payments and is far less complex than actually means testing. It's two very simple calculations and the amount payable is the lower result. Now if we wanted to get really ambitious we could throw in the pensioners council tax bill to the tax code as well**.

In order to effectively pull this off NI and income tax would need to be merged into single rates (basic 31% higher 41% under current rules although you could make additional tweaks).

The biggest problem with the current shower we have in parliament is their own personal ego trips. You don't get any unified thinking about how different systems can be tweaked and merged to give better outcomes at the same costs or similar outcomes at a lower cost. We've seen it already with Pickles and the other one arguing over whose responsibility something was (I forget what because it was oh so interesting ... honest)

You don't have to CUT benefits to save money, you don't even have to SAVE money from DWP, merely implement a system which recoups it via taxation.

* Re what Scott Wright says in the comments, it might or might not be implied that the personal allowance is deducted from this figure first before tax is calculated (I haven't made up my mind about that myself).

If yes, then the pension and personal allowance just cancel out and by and large, the tax deducted from private pension would be normal tax rate and not 50%. If not, then we'd have a 50% on a the first chunk of private pension income, which would then be at normal tax rates for higher pensions - this may seem daft, but it would enable the citizen's pension to be rather more generous on a fiscally neutral basis. And don't forget that for many pensioners, the marginal tax rate is about 100% because of the way the Pensions Credit works. Anything has got to be better than a 100% tax rate!

** Bonus points for that idea - this dovetails nicely with my cunning plan to replace Council Tax, TV licence fee etc. with Land Value Tax - if you don't think you can afford to pay the full LVT where you live, you can just ask for it to be collected via the PAYE system (so there's an automatic abatement for lower earners), so that's this whole 'ability to pay' nonsense dealt with at a stroke of the pen. And then we can start replacing income tax with LVT etc.