After a weekend of doing not a great deal, it's time to resume this series. This time the suggestion is another one that is almost so obvious that it demands a mention.
Remove the reduced upper rate of national insurance contributions and apply one rate to all chargeable earnings
National insurance is in some ways a quite complex tax. It is also one riddled with anomalies that date from the era when it pretended to be insurance and not a tax like any other.
One of the consequences of that continuing misrepresentation within this tax is that higher levels of earnings from employment enjoy a much lower rate of tax. In this year tax year (2019/20) broadly speaking earnings above £962 a week (and yes, this tax still does work on a weekly basis, revealing just how antiquated it is) are taxed at only 2% whereas those between £166 and £962 a week are taxed at 12%. Turning that higher limit into an annual equivalent, the rate of tax reduces by 10% when earnings from a continuous employment reach £50,000. By remarkable coincidence (or rather, lack of it) the income tax rate may well increase by 20% at the same point.
Ignoring the gross injustice that unearned income is not, in any event, subject to national insurance, this manipulated replacement of one tax by another is both misleading and unjust as the two taxes are not substitutes for each other.
In the absence of a merger of these two taxes, which has all its own problems, it would make much more sense for national insurance to apply to all earnings without limit but for there to be a 30% rate of income tax from £50,000 to say £100,000, plus an investment income surcharge of 15% on unearned income, as already discussed. The result would be a much more progressive tax system overall, and most especially at higher rates, and that is required to tackle the gross inequalities in our society.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Why an investment income surcharge?
I am retired but not yet eligible for a state pension. I have worked from 20 to 64 do not have a final salary pension and so I am wholly reliant on my personal pension and savings. Do you think 44yrs of continuous work isn’t sufficient to take my foot of the pedal??..you seem to have set prejudices – like all unearned income is in the hands of the ultra ultra wealthy who were born into it..when the reality is most savings will have been hard earned and will have already been subject to income tax and NI..
As a secondary point if you are forcing ordinary people to stay in the work place until the state pension becomes eligible then employment opportunity and progression is denied to the younger generation.
Do you have a problem with paying tax on an equal basis to those in employment?
Why?
Well for a start annuity rates are so low
so pension returns are incredibly low. By taxing hard you force those in retirement into near poverty.. or of course force them to work until they die!!… of course those on final salary schemes don’t have the problem of low annuity rates and they are sitting pretty.
I do think you might be protesting too much
Do you think younger generations have a duty to keep you in the cruises to which you wish to be accustomed?
A very patronising comment given that you know know nothing of my circumstances and in any case they are irrelevant..what matters is the overall situation. If you think you should tax pensions harder when annuity rates are at record low levels then so be it..guaranteed to be electorally disastrous for Labour if that matters..
As I mentioned earlier there is no more obvious way to hurt the younger generation that keeping older experienced people in the workplace..which your idea would lead to.
Have you noticed the claimed U.K. employment rate?
I am sorry, but you’re making little or no sense
And you’re assuning I am party political too
I suggest you stop wasting my time
Alvin Gibbs says:
“Why an investment income surcharge? ” Is this proposal a surcharge ? I don’t think so, it’s just proposing to treat all income as income irrespective of its source.
“….when the reality is most savings will have been hard earned and will have already been subject to income tax and NI..” Sounds convincing until we consider how much of a person’s savings and assets have been accumulated in the shelter of various tax reliefs.
“As a secondary point if you are forcing ordinary people to stay in the work place until the state pension becomes eligible then employment opportunity and progression is denied to the younger generation.”
I’m not convinced the economically foolish trend towards forcing ‘ordinary people’ to stay in work is changed by these proposals. I can’t help wondering if you are an ordinary person yourself, ….given you have enough accumulated wealth to be fretting about it and I haven’t, I wonder which of us is more ordinary. (Numerically as a proportion of the population as a whole.)
Would prefer it if the tax rate is not reduced to 30% but say to 35% make it even more progressive
What about the self-employed? Since they are both the employer and the employee, should they pay both employer’s and employee’s NIC? Seems harsh but it is logical.
What about employer pension scheme contributions? These are just wages paid through a deferral mechanism, should they not be subject to NIC?
I would have the class 4 rate continue without limit
‘Do you think younger generations have a duty to keep you in the cruises to which you wish to be accustomed?’
That’s an interesting observation. because with annuity rates forecast to remain at subdued rates for a protracted period of time, do you think younger generations have a duty to keep public sector retirees in their DB benefits to which they have, and will become, accustomed ?
Yes
I do
They were contracted
And they exist on the private sector too
Georgie Osborne’s £1m pension cap is brilliant. One wonders if he designed it specifically to show to everyone exactly how much State employees are squirrelling away of everyone else’s cash in the form of their pensions. I suspect not, but the effect has been to make people who have incomes many times that of the average punter start complaining about their £1m pension pot as well. I mean, thats really going to get normal people’s sympathy isn’t it?
‘Hey Steve, have you read this, Brigadier Bloggs gets paid £100k/yr and he’s worried he can only have £1m in his pension pot before having to pay more tax’
‘I know Bob, its a worry to us all.’
The idea, constantly promoted by those who have an antipathy towards the ‘featherbedded’ and ‘gold plated’ public sector pensions should realise they are not exceptionally generous. They may well be more ‘generous’ than those defined contribution pensions in the private sector where the risk is wholly carried by the employee because the pension being paid at retirement is to a large extent dependent on the investment returns of the stock market and therefore the pension they can expect may well be less ,whereas defined benefit pensions share any investment risk between employee and employer which is surely a much more civilised relationship which recognizes the contribution the employee has made and the benefit to the employer of their work they have done but now in their declining years are not able to do so.
Public sector employees do not get the pension for nothing, they have to make payments, in the Police it is around 14 per cent of their salary, therefore quite a tidy sum so they are not getting something for nothing. I realise that they are neither defined contribution nor defined benefit as no fund exists.
As a local government employee with well over 40 years employment my entitlement was 60 per cent of salary, hardly the ‘generous gold plated pension’ and yes an investment fund does exist but it does have a low management charge ratio which, over time, makes a difference to the pension received.
Surely an argument for a nationalised pension scheme so that all who retire do so on the true basis of equivalence?
I am in receipt of a final salary pension, as well as the state pension and because of many years of saving (thrifty wife + old fashioned watch the pennies) I consider myself fairly well off. By that I mean that my income exceeds expenditure. A saying about a sixpence comes to mind!
The point of that preamble was that it took perhaps a couple of years after getting my first job that I finally got a pay packet that had had income tax taken off. My reaction? At last, I was finally earning enough to pay tax! Almost 60 years later I am still paying tax. I still don’t grudge it, I just grudge some of the wasteful things it gets used for.
🙂
Your taxes don’t fund spending Mr John, however wasteful it may be, so don’t be disappointed. You only get charged it to control inflation.
That’s not true
I have explained there are six reasons to tax:
1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;
2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;
3) To redistribute income and wealth;
4) To reprice goods and services;
5) To raise democratic representation – people who pay tax vote;
6) To reorganise the economy i.e. fiscal policy.
I think Alvin’s suggestion that all savings have been subject to income tax and national insurance is incorrect. Pension savings which form the majority of private savings enter the pension system tax free with HMG contributing at 20% or if you are fortunate enough at higher rates based on the individuals highest tax rate. The income within the pension scheme is also largely tax free. It does not seem unreasonable then that when the pension is withdrawn it is treated as taxable income as it has never been previously subject to tax.
The problem arises where the income is insufficient. Older people will find it much harder to obtain employment at anything like a decent level of pay as they have by definition less of a time to contribute to the employer, they are subject to a higher probability of illness and there is outright prejudice when it comes to employing older people. Older people also have fears that they will not be able to afford even a reasonable level of lifestyle into their old age and that they may end their days in poverty and depression.
As a society we need to address the difficult issues that effect all sections whether that is pensions, housing affordability, health care, job insecurity, mental health and environment.
You are right
Pension subsidies cost the UK at least £54 billion a year
Out of interest what do State Pension subsidies cost the tax payer? And also of interest what does that equate per head?
There is no such thing as a state pension subsidy.
“No such thing as a state pension subsidy” , except it is all funded by the taxpayer.
No it isn’t actually
learn something about how government is funded, I suggest
The figure is only £54bn if you do an incorrect calculation and ignore how and when the tax relief is repaid.
But you know this, as it’s explained to you every time you try and wheel out this misleading statistic.
So it must be deliberate misrepresentation on your behalf.
For comparison, how much do public sector pensions cost the taxpayer?
Accounting does not allow offset of current cost against credit from past contributions. They are completely different issues. I am completely correctly representing this as a result. You and HMRC are not.
Jason Brown says:
“The figure is only £54bn if you do an incorrect calculation and ignore how and when the tax relief is repaid.
You reckon the tax relief is repaid…?
I’m not convinced of that and the sums involved when you consider the tax exempt investment environment and the real effect of inflation….. these are hard sums…..
Paul Mayor says:
“The idea, constantly promoted by those who have an antipathy towards the ‘featherbedded’ and ‘gold plated’ public sector pensions should realise they are not exceptionally generous”.
The only people claiming that such pensions are not ‘exceptionally generous” are those who don’t fully understand the value of what they have been given.
“whereas defined benefit pensions share any investment risk between employee and employer ”
No such sharing of risks exists – the employees accepts none of the risks and the taxpayer takes all of the tick.
“Public sector employees do not get the pension for nothing, they have to make payments, in the Police it is around 14 per cent of their salary, therefore quite a tidy sum so they are not getting something for nothing.”
For most public schemes, the true taxpayer cost (I.e. real world cost, not the unrealistic one often quoted in scheme reports) Is 2-3x what the employee pays, sometimes more.
“I realise that they are neither defined contribution nor defined benefit as no fund exists”
No, that has nothing to do with it, these are defined benefit schemes because the benefit is er defined!
“As a local government employee with well over 40 years employment my entitlement was 60 per cent of salary, hardly the ‘generous gold plated pension’ and yes an investment fund does exist but it does have a low management charge ratio which, over time, makes a difference to the pension received.
Surely an argument for a nationalised pension scheme so that all who retire do so on the true basis of equivalence?”
You can’t invent money out of nothing – these schemes we horrendously expensive and require massive subsidies from ordinary taxpayers to public sector workers.
Who is going to subsidise ‘everyone else’ in your proposed structure?!
An actuary would give herself a capital A on the surname
You didn’t
Oh, and all money is invented out of nothing. You really do have a lot to learn.
Given the amount of typos you write on a regular basis Richard, it seems a bit unfair to be criticising someone else’s punctuation.
And if ‘all money is invented out on nothing’, then tax relief costs nothing as we can print as much as we like without consequence…
Oh dear….
The trolls are out today
Sadly, contrary to those who say the opposite, money is from nothing. Only the availability of resources, be they labour or materials, gives it a value.
Lets take the implication of impoverishing pensioners to its logical conclusion: less spent in local communities, a lack of participation which can only result in depression, ill health, early death and a demonstration of the lack of appreciation of those who have built the infrastructure we all enjoy today.
Defined benefits do share the risk, as actuarial adjustments are mad, to pensions paid on retirement over time to reflect the change in market conditions partially by changing the amount paid by the employee, and the final salary paid even in the public sector. I know, I have been in the LGPS for years and I do not think other public sector pensions have been immune to comparable changes to reflect prevailing conditions.
Finally I do appreciate what I have been given but, I will never be persuaded by those who seek to deny to those who have so little.,under the guise of financial probity, that reducing pensions paid will help anyone.
A ‘race to the bottom’ comes to mind.
I feel a blast g in pensions coming on
You get them Paul
There’s a mighty lot of nonsense being said
Does that mean you are claiming that NIC is more than sufficient to fund state pensions?
If not, how can you make such a claim?
NIC is a tax
“NIC is a tax”, doesn’t answer the question
Given that the question was utterly opaque as I recall it, and the answer is technically correct you’ll have to be precise than that
I find some of your comments about pensioners very upsetting.
My pension is about £15,000 a year and I pay tax on some of it. You would want me to pay NI as well. I have never been on a cruise, and haven’t been abroad for over ten years as I never renewed my passport, knowing I couldn’t afford to go abroad.
The only reason my pension is that much is because my husband died at 65 and I was given some of his. He got a pension for a whole six months, having paid in all his working life.
I need a new roof for my house, and I can’t afford it.
Thank you for making me feel even more useless and worthless than I already did.
I find it quite annoying that people make up stuff I have not said
I have not said a word about applying NIC to pensions, ever
And I have said the income tax investment income surcharge I have suggested should be subject to much higher thresholds for people of pensionable age
So whilst I have sympathy with your claimed plight you really are making false claims about me
And I wonder why that is?
Well, to put it onto perspective public sector pensions are DIRECTLY subsidized to the tune of £14bn a year (payments less contributions).
That and for the equivalent salary a public sector worker will have a pension 2-3 times the size of a private sector worker.
If that isn’t a subsidy, I don’t know what is. Yet you go around claiming that the private secotr is getting subsidized to the tune of £54bn a year – just because the money doesn’t get taxed on the way into the pension scheme (which is the same in the public sector as well).
It’s almost as if you are getting paid by some public sector unions to argue for higher tax on everyone in the private sector so the unionised public sector workers can get EVEN bigger pensions.
I assume also that you have a nice DB pension stashed away somewhere?
I suggest you need to research relative pensions
Most public sector pensions are very small
And no, it’s not a subsidy. It’s a contractual obligation
No union payments for a long time
None sought
And as for my DB pension, three years worth in the university, non guaranteed scheme
Just rather boredwith misinformation and trolling
“I suggest you need to research relative pensions”
Perhaps you need to do the same?
“Most public sector pensions are very small”
Only because the amount of service is small and hence the contributions have been even smaller. By any sensible definition, if the pension received is many multiples of the contributions paid, someone has subsidised the pension. That ‘someone’ is the taxpayer,
“And no, it’s not a subsidy. It’s a contractual obligation”
It’s a ‘contractual obligation’ which is paid for by the taxpayer. No idea why you would deny this?
“And as for my DB pension, three years worth in the university, non guaranteed scheme”
what do you mean ‘non-guaranteed’? It’s a DB scheme, of which the majority is funded by the taxpayer. Again, why would you deny this?
“Just rather boredwith misinformation and trolling”
So why do you keep doing it?
The taxpayer does not pay for government spending
You need to do some serious reading
Right now you’re writing a lot of nonsense
It’s all on here but I I’ll nit rewrite it for you
Shouldn’t you be honest about pensions before trying to pretend that other people should research pensions?
I have not a clue what you’re saying
But I can spot a troll a mile off
No Richard not everyone that objects to something’s that you say is a troll, to continuously say so shows how shallow you are in your argument at times.
The fact is that the gap between final salary pensions and defined benefit pensions is incredibly wide and you brush that under the carpet..for those of us taking annuities the rates are at the lowest rates in history and you provide glib comments. The fact you want to tax further in your crusade to bash the rich shows how out of touch you really are.
Tell me what this has to do with this blog post?
And then explain why you aren’t trolling
Actually, I wouldn’t waste your time if I was you
The vast majority of public sector pensions are unfunded schemes and therefore do not rely on investment returns to partially fund the pensions paid out, A much more efficient way of providing a pension. full stop. The ‘subsidy’ is purely notional.
Precisely
Andrew (Andy) Crow says:
I’m not convinced of that and the sums involved when you consider the tax exempt investment environment and the real effect of inflation….. these are hard sums…..
Given that people do indeed pay tax on their pensions then quite clearly some of it is repaid.
Why someone would pretend otherwise is beyond me (unless of course they are trying to deliberately mislead…
You clearly are not even trying to understand what might be being said
Paul Mayor says:
The vast majority of public sector pensions are unfunded schemes and therefore do not rely on investment returns to partially fund the pensions paid out, A much more efficient way of providing a pension. full stop. The ‘subsidy’ is purely notional.
That’s absolute nonsense.
Well, not actually
Richard,
Out of interest, when did you get your actuarial qualification in pensions?
Thanks, Jeff
Who do you think audits actuarial opinion?
I was an auditor for many years
But what the heck
When did you get a qualification in trolling?
Barry says:
“Given that people do indeed pay tax on their pensions then quite clearly some of it is repaid.”
Exactly so….some of it.
You think a non-actuary audits actuarial opinion?
Do the IFoA know this, as it doesn’t;t seem to be in any of the regulatory guidance!
You really are deluded!
They certainly do
All audits have to do that when an actuarial opinion is offered
Seriously Richard, when try and pretend you know much more than you actually do, you just make yourself look very silly.
And then you have to censor people who are trying to enlighten your readers and correct your misrepresentations.
Which isn’t the action of a credible professional.
You do know this blog is about NIC, don’t you?
For some reason it’s been trolled to be about pensions, to which it is unrelated
I am asking quite seriously, can you read well enough to work out what something is about?
If you’re proposing to remove tax relief on pensions then the obvious implication is that the contribution rates from public sector employees would need to increase accordingly – is that what you are suggesting?
Or do you just expect the taxpayer subsidy to increase even further?
Have you noticed this is about national insurance?
And I have not mentioned charging pensions to NIC?
With respect, it would appear that you are the one with all the problems.
No wonder I’m blocking you
I only deal with competent people
[…] ‘Tax reform of the day’ referred to national insurance contributions, Â and for reasons that are not entirely clear it […]