NI and Pensions
Posted: April 2nd, 2024, 10:43 am
Moderator Message:
Moved here, leaving a link, from Retirement Investing as the thread has little to do with investing. - Chris
Moved here, leaving a link, from Retirement Investing as the thread has little to do with investing. - Chris
I noticed that Jeremy Hunt was talking about abolishing NI, presumably only the employee variant. Looking at the polls it's vanishingly unlikely he'll be in a position to do so. But it got me thinking. I've never been a fan of NI as it really just a tax on employment which in the modern age is something that absolutely should not be taxed directly. However if life provides lemons then manufacturing lemonade is the game to play. I'm also wondering if Labour will see the measure as attractive.
I'm currently not drawing from my ISA and only drawing the tax allowance from my pension, until recently I was coming to the conclusion that I would be best served by drawing from my ISA rather that taking cash from the pension and incurring tax, there are also estate advantages to a pension.
If however NI is abolished then presumably the massive drop in revenue will have to be recouped through general taxation. If this actually turns out to be the direction of travel then it may make sense to pull money from the pension whilst nominal tax is 20% and deposit what is not needed into the ISA and then take from the ISA when nominal tax rises.
NI is a distorting tax that penalises ordinary folk so it's abolition is welcome and it has some interesting collateral consequences.
1) The NI record currently defines eligibility for the state pension, they have defined it a benefit but with a linkage to actually having paid for it at least notionally via NI people would feel robbed if it was means tested. Getting rid of NI and thus the concept of a person having funded the pension, would ease the inevitable move to alter it from a universal benefit into a rather more discretionary one.
2) Salary sacrifice distorts the way pensions and the tax system function and the biggest benefit in using it is the avoidance of NI. SIPP pension providers cannot compete with a company pension once salary sacrifice is in the picture and savvy employees are able to use salary sacrifice to tweak their take home pay to avoid the the various tax cliff edges.
There is also often talk about changing tax rebated into a pension based on income. Salary sacrifice allows a higher rate tax payer to avoid paying that higher rate by never in effect of having the money that would have attracted that tax. Which in my mind makes the proposal too hard to implement.
Whilst abolishing NI doesn't completely streamline all these things, it would markedly change the landscape and in concert with other measures would allow these various areas of revenue leakage/perceived unfairness to be addressed.
3) I view the pension and ISA tax wrappers as simply arbitrage, which one is best depends on the tax situation of the funds to be deposited. If the funds are untaxed then ISA is best. If the funds would be taxed at 40% then pension is best. If the funds are to be taxed at 20% then it's a wash. Except it's usually not 20%, a pension has a tax allowance and an amount that can be taken tax free AND if salary sacrifice is employed then the avoided tax is much more than 20%. Without salary sacrifice the pension still has the edge for a 20% taxpayer (it will have to be more than 20% in the envisaged scenario), however it is much less clear cut as the pension has a bunch of strings an ISA doesn't have, I'd say that an ISA's flexibility would trump a pension if NI was not being saved for a fair few.
Equally if general taxation rises people who have paid into pensions and received only the 20% tax rebate will end up paying more on the way out.
4) HMRC has been fixated with NI leakage via limited companies for many years and has attempted to address the issue with IR35, which is arguably the worst possible tax legislation I've seen. It starts with the problem (NI not being paid when HMRC thinks it should be) and attempts to wrangle that answer from an incongruent real life. Abolish NI and the IR35 mess can also be binned.
I think therefore there a lot of attractions to getting shot of NI, however the money needs still to be raised and I for one will be factoring it in as a possibility going forward.