Wednesday, 27 November 2019

Your occasional reminder...

From Professional Pensions:

The government will pay out £21bn in income tax relief for pension contributions this tax year, while national insurance relief payments will rise to £18.7bn, according to statistics from HM Revenue and Customs (HMRC).

The estimated figures - published yesterday (10 October) - reveal the cost of income tax relief for registered pension schemes in 2019/2020 will be higher than the year prior, estimated at £20.4bn, and five years ago at £17.9bn.

This covers relief on contributions, relief on investment returns, and tax paid in retirement - but the figures do not provide estimates on the total receipt in tax when pensions are in receipt.

That last bit isn't quite clear - isn't "tax paid in retirement" the same as "receipt in tax when pensions are in receipt"? But hey, let's run with the headline figure. 'Cost' for these purposes is the equal and opposite of the value of the tax saving to the individuals, it's the same thing.

As ghastly as taxes on earnings (income tax and National Insurance) are, if I were in charge, I would chuck the 'focused' tax savings for pensions contributions (focused on older and wealthier people, including Yours Truly; and ultimately on the insurance companies which siphon it all off again) in the bin and share out the savings more equitably:

1. Increase the NIC thresholds (primary and secondary) to £12,500 (same as the personal allowance for income tax). Tax saving per employee earning more than £12,500 = £950 or so, call it £25 bn all in. That's an important first step towards a Basic Income. The Employment Allowance and Apprenticeship Levy can go in the bin as well.

2. Reinstate the personal allowance for those earning more than £100,000 (which results in a marginal income tax rate of 60%), tax saving maybe £3 bn. Either you believe in universal entitlements or you don't, and I do.

3. Harmonise Employees' primary NIC (currently 12%) and self-employed Class 4 NIC (currently 9%) at 11%, an overall tax saving of £6 billion or so. The self-employed will squeal, but so be it. Lower earning self-employed will be up to £370 better off, and those at the upper end will be paying £300 or so more (paying £3,724 = 11% x £46,350 - £12,500, instead of £3,413 = 9% x £46,350 - £8,424), hardly a life changing amount. Employees at the upper end will be saving £800 or so a year. There are more of the latter than the former.

4. Depending on how much is left over (it gets circular and there is guesswork involved), we can start chipping away at Employer's Secondary NIC, get it down from 13.8% of wages to 12% or something...

Shocking stuff, the audience cries, but a government would just have to do it and damn the torpedoes. (As far as I am concerned, the flat rate state pension of £160 covers it, there's no need for more endless tinkering on top).

By the next election, which party would be brave, stupid or corrupt enough to pledge to reverse this? How's that going to go down on the doorstep: "We pledge to hike tax rates for most people for the benefit of large corporations who make large donations to our party and offer us cosy jobs when we retire"?


PJH said...

I'd like to know why this insistence on not taxing something is considered a "cost."

This is like saying the government not taxing my morning ablutions is a "cost" because they're not taxing the stuff I'm flushing down the toilet.

Or not taxing people 100% of their income above a certain level is a "cost" of the difference between what they are being taxed, and that 100% figure.

Lola said...

If they'd had kept to the basic social contract of pensions being deferred income and restricted any tax 'relief' on pension savings to the basic tax rate thing would be a lot better now. (And they need to scrap all the 2015 'reforms' which have resulted in all sorts of unforeseen negative effects).

And as I have pointed out before (and ignoring all government employees pension schemes, including quangos) private schemes are now relatively good value.

But yes, I support all those reforms.

mombers said...

@PJH it's only a 'cost' in my opinion if it's a deduction or exemption against existing taxes. Nobody pays tax to poop but if there was a tax on it and say pensioners were exempt or you could deduct it from other taxes, e.g. income tax. So much of government spending is a cost of taxation, e.g. refunding part or all of low to middle income households' VAT + NI + income tax via UC or Tax Credits but that's a different issue to allowing deductions or giving exemptions

mombers said...

@Lola I think part of the enormous cost is to do with working age taxes being so much higher than pension age ones. Basic rate is effectively 40.2% with two sets of NI and income tax vs 20% tax on pensions. NI paying for pensions is a fiction but surely if it did, the most voracious users of pensions (and healthcare + other welfare programs) should pay NI as opposed to a low income sod who dies before even getting a pension or needing decades of old age healthcare.

PJH said...

Basic rate payroll tax, not including employer's, is (20%+12%=) 32%. Including employer it's (32%+13.8%=) 45.8%.

[Next band after that is (40%+2%) 42% and (42%+13.8) 45.8%]

I'm unclear where 40.2% comes from?

PJH said...

"...and (42%+13.8) 45.8%"

I cannot add up. That should, of course, be 55.8%...

Lola said...

Yes. I support a flat income tax and scrapping NI. (Clearly I'd rather scrap all taxes on labour and capital - but if that is not the case then a flat IT is least worst).
Trouble is NIC/State benefits were sold to us on the basis that you'd pay in all your life and then get it back. So taxing it would be being taxed twice (yes yes I know I know - but that's how people feel).

And of course older people consume more health care. For the vast majority of people (yrs trly excepted) the peak of medical costs occurs in the last two year of life.

mombers said...

@PJH employer lays out £113.80 to pay the employee £100. They then also have to take off £20 income tax and £12 NI, so the employee gets £68 off £113.80 or total tax of £45.80. 45.80/113.8 = 40.2%. The situation just gets worse when you add in the 0.5% apprenticeship levy, and employer contribution under auto-enrolment for pensions (although you get that back in theory, it dents your take home pay today, the employer does not give it to you for free)

Mark Wadsworth said...

PJH, see Mombers' replies.

a. 'Cost' is just the opposite of tax saving. It's a bookkeeping thing with no particular moral weight attached.

b. Effective rate is 40.2% for basic rate taxpayers. Add on at least 10% for VAT, there's your 50% basic rate tax. Far worse for people on means testing, higher earners, people with student loan repayments etc.

L, agreed, ta. Imposing NI on pensioners is a non-starter, economically, politically, administratively, whatever. Introducing LVT is an uphill battle already :-)

Francis said...

Bit of a late comment, but:

The idea that the personal allowance is an "entitlement", akin to a state benefit rather than a part of the tax system, I find very odd.

Is the 25% between the 20% and 45% rates an entitlement?

Mark Wadsworth said...

F, mathematically it is exactly the same thing. I, in turn, find it odd that you consider two things which are exactly the same to be somehow different.