NI and Pensions

[ayshfm1]

Moderator Message:
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.

[Charlottesquare]

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.

There are a lot of political issues that arise, if IT rates need to rise as a result on scrapping NI, and this increased IT applies to pensions, there would be a very hard backlash . The retired vote is generally required to win an election, so not so sure IT rates can rise for pensions and the party proposing same get elected thereafter.

[Urbandreamer]

NI is a distorting tax that penalises ordinary folk so it's abolition is welcome and it has some interesting collateral consequences.

NI was not a tax, but as it's name "National Insurance" suggests, a state sponsored insurance scheme.
All workers payed in and received benefits such as medical treatment, unemployment pay and pension.

Initially as the amount to be paid out was not dependent upon income, contributions were capped.

At some point the government decided that NI, despite it's name, is now a tax. Contributions continue at a reduced rate once you achieve a certain income.

However to return to your statement. What is morally wrong with charging ordinary folk the cost of the service provided?

Do I detect the hint of a suggestion that the "rich" should pay for the rest of us? I.E those who are not "ordinary folk" get bilked?

[tjh290633]

There are a lot of political issues that arise, if IT rates need to rise as a result on scrapping NI, and this increased IT applies to pensions, there would be a very hard backlash . The retired vote is generally required to win an election, so not so sure IT rates can rise for pensions and the party proposing same get elected thereafter.

Has it escaped your notice that Hunt is making pensioners pay for his abolition of NICs? The failure to increase personal allowances does just that.

TJH

[Charlottesquare]

There are a lot of political issues that arise, if IT rates need to rise as a result on scrapping NI, and this increased IT applies to pensions, there would be a very hard backlash . The retired vote is generally required to win an election, so not so sure IT rates can rise for pensions and the party proposing same get elected thereafter.

Has it escaped your notice that Hunt is making pensioners pay for his abolition of NICs? The failure to increase personal allowances does just that.

TJH

Big difference to say slapping 3%- 5% on the IT rate and apply it to all income to cover the cost to HMG of no NI receipts ex employees.

Also pensioners got the inflationary increase in state pension so not sure they ought to feel persecuted.

In addition the non increase in personal allowance applies to everyone not just those in receipt of pensions, hardly targeted at them, whereas an increase in some tax rates ( either Employer NI, VAT or Income Tax) will certainly be needed to cover scrapping NIee. And of course if you exempt pensioners then all those sub 40 will be upset that tax burden placed on them, plus expensive houses , oldies getting a free ride, etc, etc, lots more votes.

In my experience people squeal more when they pay more than they say thank you when they pay less- human nature, a bribe is soon forgotten, a cost to them and they nurse their wrath like Tam O Shanter's wife

If in doubt have a look at the Red Book and observe what NI total (NIee and NIer) contributes to HMG's income (£168bn total, scrap NIee part and you need to plug the hole somewhere in the Big Three- page 96)

https://assets.publishing.service.gov.u ... le__2_.pdf

[ayshfm1]

I know NI was supposed to be a way to link funding certain things to the tax paid to fund them. However this has long been an inconvenience that Governments of all colours deprecated. As of now it is just another tax, and when looked at in that context it's not a fair one.

Some people are exempt (pensioners)
It is only paid on employment (employer and employee NI)
It falls predominately on the lower paid employee's, it didn't used to be levied on income above a certain point and even now it's only 2%.

Don't however mistake me for someone who thinks the average person should be excused from paying for what they consume. Quite the contrary I believe the current situation where a very few pay the lions share of the taxes is dangerous, if I were one I would not be in this country and I'm amazed how many of them sit still and get fleeced. For example I note that Rishi got his overall tax rate down to 23% on 2 mill, if I were he, mine would be 0 and I'd not be coming to this rain sodden land very often. I'm just not a fan of addressing the imbalance using NI.

[Nimrod103]

I know NI was supposed to be a way to link funding certain things to the tax paid to fund them. However this has long been an inconvenience that Governments of all colours deprecated. As of now it is just another tax, and when looked at in that context it's not a fair one.

Some people are exempt (pensioners)
It is only paid on employment (employer and employee NI)
It falls predominately on the lower paid employee's, it didn't used to be levied on income above a certain point and even now it's only 2%.

Don't however mistake me for someone who thinks the average person should be excused from paying for what they consume. Quite the contrary I believe the current situation where a very few pay the lions share of the taxes is dangerous, if I were one I would not be in this country and I'm amazed how many of them sit still and get fleeced. For example I note that Rishi got his overall tax rate down to 23% on 2 mill, if I were he, mine would be 0 and I'd not be coming to this rain sodden land very often. I'm just not a fan of addressing the imbalance using NI.

NI is not "just another tax". Payment of it is the basis on which entitlement to the state pension is calculated. So it is ridiculous for pensioners to pay it.

[the0ni0nking]

NI is not "just another tax". Payment of it is the basis on which entitlement to the state pension is calculated. So it is ridiculous for pensioners to pay it.

I debated about whether to reply to the posts on this thread but thought I should - if only to give the perspective of someone; a lifelong Conservative voter; in their early 40s.

Ni is exactly just another tax in my mind. You might not like it because you think you've paid your "stamp" and are therefore entitled to a state pension that falls outside of the tax system but I disagree.

20 years or so ago when I started work, I was fairly sure the state pension was unsustainable - as it is proving by the moving of the age limits etc. So i took the view my retirement provision needed to rely on me - not any state provision - and I've maintained that view since.

I certainly don't care whether you think you are entitled to it because of previous contributions - that doesn't preclude you from paying tax on it; either income tax or NI. I do agree with some other posters than NI is somewhat regressive but would it really make any difference if we got rid of NI and instead taxed you more on the pension via income tax.

In the same way that some here moan about entitlement to benefits; so it seems they exclude themselves from that category when they wish to do exactly the same on the state pension.

[Nimrod103]

NI is not "just another tax". Payment of it is the basis on which entitlement to the state pension is calculated. So it is ridiculous for pensioners to pay it.

I debated about whether to reply to the posts on this thread but thought I should - if only to give the perspective of someone; a lifelong Conservative voter; in their early 40s.

Ni is exactly just another tax in my mind. You might not like it because you think you've paid your "stamp" and are therefore entitled to a state pension that falls outside of the tax system but I disagree.

20 years or so ago when I started work, I was fairly sure the state pension was unsustainable - as it is proving by the moving of the age limits etc. So i took the view my retirement provision needed to rely on me - not any state provision - and I've maintained that view since.

I certainly don't care whether you think you are entitled to it because of previous contributions - that doesn't preclude you from paying tax on it; either income tax or NI. I do agree with some other posters than NI is somewhat regressive but would it really make any difference if we got rid of NI and instead taxed you more on the pension via income tax.

In the same way that some here moan about entitlement to benefits; so it seems they exclude themselves from that category when they wish to do exactly the same on the state pension.

Abolishing NI and paying state pensions out of general taxation will lead inexorably to the state pension becoming a welfare benefit only paid to those too poor to support themselves in old age. It means that pensioners of middling incomes will derive nothing from the welfare state, which from its inception was intended to be universal. Once the welfare state is restricted, support for it will wither. So a currently well off pensioner on say £22000 total pension income will see that income halved. That is not going to go down well. The only way it would work is if general income tax (and other tax) rates were significantly reduced, so that working people can build up private pensions to replace the state one.

[the0ni0nking]

In my opinion, you seem to be living in a world different to mine. The state pension is funded by taxes - howsoever raised. It is a simply incorrect idea that hypothecation is an actual thing when money ends up in the governments coffers.

Just because that might have been how it was intended to be in a bygone age doesn't make it the case now.

There is no reason in my mind why the state pension shouldn't be taxed as it ultimately forms part of the income of those eligible to take it.

[Sorcery]

NI is not "just another tax". Payment of it is the basis on which entitlement to the state pension is calculated. So it is ridiculous for pensioners to pay it.

I debated about whether to reply to the posts on this thread but thought I should - if only to give the perspective of someone; a lifelong Conservative voter; in their early 40s.

Ni is exactly just another tax in my mind. You might not like it because you think you've paid your "stamp" and are therefore entitled to a state pension that falls outside of the tax system but I disagree.

20 years or so ago when I started work, I was fairly sure the state pension was unsustainable - as it is proving by the moving of the age limits etc. So i took the view my retirement provision needed to rely on me - not any state provision - and I've maintained that view since.

I certainly don't care whether you think you are entitled to it because of previous contributions - that doesn't preclude you from paying tax on it; either income tax or NI. I do agree with some other posters than NI is somewhat regressive but would it really make any difference if we got rid of NI and instead taxed you more on the pension via income tax.

In the same way that some here moan about entitlement to benefits; so it seems they exclude themselves from that category when they wish to do exactly the same on the state pension.

Knowing Hunt and Sunak as mean rapacious politicians, the idea of folding NI into tax, offers them the opportunity to apply the extra tax to the whole income instead of NI applying at only 2% to those earning over £967.00 a week.

[kempiejon]

Ni is exactly just another tax in my mind. You might not like it because you think you've paid your "stamp" and are therefore entitled to a state pension that falls outside of the tax system but I disagree.

I disagree but in a different way. I've never seen NI as a tax nor as a way of accruing anything. It's paid by those in work to support those unable to work. All those here on benefits are getting that from the NI paid by those employed and their employers, the employers pay a little more. But it doesn't really work like a pot like that. I have easily accrued entitlement if you see it that way to state pension whilst signing on not working.

[kempiejon]

Has it escaped your notice that Hunt is making pensioners pay for his abolition of NICs? The failure to increase personal allowances does just that.

TJH

For now SP is below the personal allowance. I can't see the merit in it exceeding it would fiscal drag get there?

[Nimrod103]

In my opinion, you seem to be living in a world different to mine. The state pension is funded by taxes - howsoever raised. It is a simply incorrect idea that hypothecation is an actual thing when money ends up in the governments coffers.

Just because that might have been how it was intended to be in a bygone age doesn't make it the case now.

There is no reason in my mind why the state pension shouldn't be taxed as it ultimately forms part of the income of those eligible to take it.

But the state pension is taxed,that is, it makes up an equal component in one's taxable income. The fact that a full state pension is currently similar to the tax free allowance (which applies to pensioners and non-pensioners alike) is pure coincidence. I'm sure it couldn't be very long ago when the old state pension was higher than the single person's allowance.

All governments like to pretend that taxes are not hypothecated in the UK, but the state pension age has been increased in recent years to ensure that payments don't veer to far off of the amounts of money contributed to pay for it. Indeed the whole recalculation of years needed, increased charges to working women, increased payments under the new flat rate state pension, and increased normal retirement age, was AIUI done on the basis that the overall costs would remain roughly constant, and thus in line with maintaining a relatively even National Insurance contribution rate.

[ayshfm1]

Abolishing NI and paying state pensions out of general taxation will lead inexorably to the state pension becoming a welfare benefit only paid to those too poor to support themselves in old age. It means that pensioners of middling incomes will derive nothing from the welfare state, which from its inception was intended to be universal. Once the welfare state is restricted, support for it will wither. So a currently well off pensioner on say £22000 total pension income will see that income halved. That is not going to go down well. The only way it would work is if general income tax (and other tax) rates were significantly reduced, so that working people can build up private pensions to replace the state one.

It is already called a benefit (defined as such circa 2015 IIRC why make that change....) and it's likely inconvenient that there is a legacy linkage that confers a sense that a person has "paid" for their state pension. Very few will have paid enough in real terms to have purchased the benefits it provides, it also means that it's hard to just dish out a pension to those the Government deems "need" as they often won't have qualifying NI payments.

The nuts and bolts of how this will be accomplished remain to be seen, but the numbers are simple, universal pension provision is unaffordable and at some point there needs to a lot fewer recipients. Maybe they will simply to make the qualifying age sufficiently large as to ensure few live long enough to get it.

[Nimrod103]

Abolishing NI and paying state pensions out of general taxation will lead inexorably to the state pension becoming a welfare benefit only paid to those too poor to support themselves in old age. It means that pensioners of middling incomes will derive nothing from the welfare state, which from its inception was intended to be universal. Once the welfare state is restricted, support for it will wither. So a currently well off pensioner on say £22000 total pension income will see that income halved. That is not going to go down well. The only way it would work is if general income tax (and other tax) rates were significantly reduced, so that working people can build up private pensions to replace the state one.

It is already called a benefit (defined as such circa 2015 IIRC why make that change....) and it's likely inconvenient that there is a legacy linkage that confers a sense that a person has "paid" for their state pension. Very few will have paid enough in real terms to have purchased the benefits it provides, it also means that it's hard to just dish out a pension to those the Government deems "need" as they often won't have qualifying NI payments.

The nuts and bolts of how this will be accomplished remain to be seen, but the numbers are simple, universal pension provision is unaffordable and at some point there needs to a lot fewer recipients. Maybe they will simply to make the qualifying age sufficiently large as to ensure few live long enough to get it.

Those who have a pension income of less than £10000/year can claim pension credit of £4000/year top up, and it also opens the door to several other benefits. Such people will always depend entirely on the largesse of the taxpayer, and will always be supported. Abolishing the state pension will mainly impact middle income people. Probably like most of the contributors on this discussion board.

[Lootman]

Those who have a pension income of less than £10000/year can claim pension credit of £4000/year top up, and it also opens the door to several other benefits. Such people will always depend entirely on the largesse of the taxpayer, and will always be supported. Abolishing the state pension will mainly impact middle income people. Probably like most of the contributors on this discussion board.

And what about people who bought back years of NICs in order to boost their state pension amounts, like me?

Then there is a very clear relationship between contributions made and the amount received.

Surely that should not be punished by means testing the SP or other confiscatory changes?

[Lanark]

The only reason they want to get rid of NI is so that when they completely dismantle the NHS they can say "well no-one is paying for it any more, so we cant provide the service"

[Urbandreamer]

Very few will have paid enough in real terms to have purchased the benefits it provides, it also means that it's hard to just dish out a pension to those the Government deems "need" as they often won't have qualifying NI payments.

Prove that!
It's not my argument and I don't feel like helping you do so.

However most workers will, with contributions from their employers, have paid 20% of salary for their entire working life.
In 2022 the median salary was about £30k. Assuming that someone starts work in 22 at the age of 20 and works until 67 that's 47 * £6k.
That's over £1/4 mill. No small sum.

Of course I have assumed no investment growth, because our brilliant lords and masters don't invest that "tax". Other countries do and don't consider it a tax.

AP1, AP3 and AP4, the Stockholm-based buffer funds managing capital for the Swedish state pension system, reported good returns in 2023.

https://www.pionline.com/pension-funds/swedish-pension-funds-had-good-2023

BTW, where did you get the idea that people without qualifying NI receive what they needed to qualify for? The state may be willing to prevent abject poverty, but they don't pay pensions to those without qualifying NI years.

[tjh290633]

Has it escaped your notice that Hunt is making pensioners pay for his abolition of NICs? The failure to increase personal allowances does just that.

TJH

For now SP is below the personal allowance. I can't see the merit in it exceeding it would fiscal drag get there?

My wife has a married woman's pension and a small teacher's pension. Last year she started to pay income tax for the first time in 45 years. If she is having to pay, many more with small occupational pensions must be paying it now. My personal allowance has almost disappeared in the coming tax year.

Hunt is attacking pensioners with his policy. He can't be surprised if there is a reaction.

TJH