Tax on UK pensions – nobody wants to read this! However, this article appeared in the FT last week and outlines some of the questions being considered. Further, it highlights how paying for the Covid Stimulus is going to need to happen at some point, not just in the UK, but for most global economies who have propped up workers.
1 – should pensioners pay a higher level of income tax? They have:
- Received tax relief on contributions made
- Had the option for a Pension Commencement Lump Sum meaning that only 75% is taxable anyway (from an occupational pension scheme)
- Potentially never really contributed their own money anyway to some of the defined benefit style schemes
2 – should the 25% pension commencement lump sum be reduced?
Case for pensions tax rise’ to aid Covid recovery
Think-tank head advises MPs’ committee looking at future tax options
Taxes on pensions paid to millions of retired workers could be raised to help the country’s finances recover from the Covid-19 crisis, MPs were told this week.
Paul Johnson, head of the Institute for Fiscal Studies, a think- tank, said there was a case for retirees to pay higher taxes on money drawn from occupational, or workplace, retirement plans.
“Pension tax relief restrictions and pension tax relief have raised lots of money over the past decade,” Mr Johnson told the Treasury select committee’s “Tax After Coronavirus” inquiry. “There has, of course, been no increase in the tax on pensions in payment.”
Mr Johnson said those who had already reached pension age had been “protected” from tax rises, so there was a case for “at least a modest increase in tax” on occupational pensions in payment.
Occupational pension incomes were “extremely well tax-relieved”, he added, because employers did not pay national insurance on their contribution to an employee’s pension.
In a traditional final-salary type company pension, the bulk of funding for the retirement benefit is made by employers not employees.
Mr Johnson did not specify how additional tax could be raised from occupational pensions in payment.
Currently, when money is taken from a personal or workplace pension, a quarter is tax free, with income tax payable on the remaining 75 per cent.
The amount of tax paid depends on total income for the year, after taking into account the tax-free personal allowance, currently £12,500.
Giving evidence to the same inquiry, Mike Brewer, deputy chief executive and chief economist at the Resolution Foundation, a think-tank, said that “for reasons of intergenerational fairness, we need to look at the tax treatment of pensions”.
“The government’s strategy has not been clear on that,” said Mr Brewer. “There has been a lot of tinkering, but a clear strategy would help and there is more to be done.”
The Treasury committee was investigating tax options to repair the public finances after Rishi Sunak, the chancellor, spent more than £350bn on emergency measures to prop up the economy in the wake of the Covid-19 crisis.
This week, Boris Johnson warned the UK’s economic outlook was “about to get tougher” and Mr Sunak admitted tax rises would be required to pay for the economic chaos wrought by coronavirus.
Mr Sunak said the government would “need to do some difficult things”, but this did not mean a “horror show of tax rises with no end in sight”.
Philip Booth, senior academic fellow at Institute of Economic Affairs, told the inquiry that the pensions tax-free lump sum could be made less generous to help repair the nation’s finances.
“I would severely limit the tax-free lump sum that it is possible to receive from pensions . . . which would allow a lot of pensions tax simplification instead of the route that the government seem to be proposing, which is to allow tax relief only at the basic rate, which I think would cause a degree of chaos,” he said.
The government is expected to confirm its position at the Budget, due in November.
You may also be interested in my advice on UK Pension Transfer.
