TAX AND POLITICS

TODAY’S BLOG

TAX AND POLITICS

The General election is a few weeks away, the over-egged promises are being spouted by all sides. We really must seem like a very dim bunch to those that are so wrapped up in their political ideology. Anyway, I am not here to share my political views, simply to remind you of some basic truths.

I heard one item on the news as I travelled to the office the other morning. This was another politician using the word “free” to describe what the electorate would receive. This is an interesting choice of words. I was also somewhat interested in the bashing of the uber rich. I am not in that bracket (!) and frankly there is no possibility that I ever would be. However I was surprised that some people seem to believe that those with vast wealth actually have it all in bank account that can be easily raided. Like them or not the uber rich hold assets and some cash, but mainly assets.

This in mind, I thought that perhaps a little bit of education on the tax system may be of help. There are lots of numbers involved, but stick with it if you can (I know your time is precious).

INCOME TAX

Income tax accounts for about a third of all taxes received by HMRC. When combined with National Insurance, Capital Gains Tax and Bank Payroll Tax, these make up about 55% of all UK taxes. The amount of total tax paid to HMRC rises almost every year. In 2000/01 the total stood at £315,642m in the last tax year 2018/19 it had nearly doubled to £619,367 over 18 years.

THE UNION AND TAXES

In the tax year 2016/17 for those of you interested the total tax raised was £568,603m of which 87.2% was raised in England, 3.3% was raised in Wales, 7.4% raised in Scotland and 2.1% raised in Northern Ireland.

WHO PAYS INCOME TAX

In 2017 the UK population was about 66million. Not everyone pays income tax (children, sick, unemployed, not employed and choosing to not “work”). In practice about 40% of the population pay income tax (they may well pay other taxes, but so do the 40%). In the 2016/17 tax year, there were 26.3m income tax payers in the whole of the UK. Of these 15.1m were male and 11.2m were female. 20.9m were under 65 and 5.39m were 65+.

HOW MUCH INCOME TAX DID THEY PAY?

In the 2016/17 tax year (the most recent with the data analysis). There was £174,000million paid in income tax by 26.3m individuals. So thats about 30% of all the taxes paid were from these income tax payers.  In the tax year concerned we basically have 4 categories of income taxpayer, those that simply pay the savings rate, those that pay basic rate (20%), higher rate (40%) and additional rate (45%).

As a reminder, in 2016/17 the personal allowance was £11,000 (the amount you can earn without paying income tax). This is reduced once your income is £100,000 at the rate of £1 for every £2 of income over £100,000. So anyone with an income of £122,000 has no personal allowance – all their income is taxable.

In terms of taxable income, the first £32,000 was taxed at 20%, from £32,001 – £150,000 tax is 40% and anything above £150,000 is taxed at 45%. Here is what happened.

As you can see from the table above, 81.75% of basic rate (20%) income taxpayers paid £57,300million in tax. You will remember Pareto’s law 80/20? Well its not far off, just over 80% of income taxpayers (83.78%) pay about 33% of the income tax bill. The next, smaller group, nearly 15% of the income taxpayer population of 40% taxpayers pay rather more between them – 37.3% of the total income tax bill. The smallest group (1.25% of taxpayers) those paying 45% income tax rates pay 29.6% of the total bill.

So whilst it is only part of the story – higher rate and additional rate taxpayers pay 66.9% of the income tax bill. Yet they only make up 16% of the income taxpayer population.

DO YOU WANT TO TAKE A POP AT THE 1%?

I am not supporting any political position here. I am simply making the statement that factually, if you pay income tax of 45% you are the 1%. As such you contribute a huge proportion of the total income tax bill. In exchange you have no personal allowance and probably a reduced pension allowance of £10,000 – less than an ISA. Let me also remind you that an income of £150,000 does not make you a millionaire…

If you fancy having a pop at the “millionaires”, taking the same data but just considering Additional Rate Taxpayers. There are 16,000 people with incomes of £1m+ (0.06% of income taxpayers) pay 8.79% of total income tax collected. So I will leave this here for you to mull over.

I have taken all this data from published HMRC and ONS documents that you can easily search and check yourself.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk 
Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

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GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Bakery, 2D Edna Road, Raynes Park, London, SW20 8BT

Email – info@solomonsifa.co.uk    Call – 020 8542 8084

WHAT WE’RE ALL ABOUT

If you would like a no-nonsense one page document explaining what financial planning is all about please enter your email here.

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TAX AND POLITICS2019-12-02T12:06:55+00:00

Taxing Reforms for Pensions

Taxing reforms for pensions

There has been considerable “chatter” about the prospect of pensions being reformed even further. In particular, the tax of pensions is very much up for debate, making the prospect of tax reforms for pensions a genuine possibility.

In brief the Chancellor has already made huge changes to the pension system, enabling a pension to be taken as a lump sum or as income without any requirement to buy an annuity.  In addition, a pension can now be easily passed on to beneficiaries of your estate, rather than ceasing when you do.

Tax Overpayments

The new freedoms have already and will continue to mean that some people don’t do their sums properly and end up paying too much tax – unnecessarily, which of course is a good thing if you run HM Treasury… every little helps and all that.

In very simple terms, most people will currently find that whatever the size of their pension pot, they can take 25% of it as tax-free cash (these days “we” call it a pension commencement lump sum – or PCLS). The rest is taxed as income.

Reforming tax relief

At the moment, anyone that pays into a pension gets tax relief – either at 20%, 40% or even 45% depending on your rate of tax. Everyone gets 20% (from age 0 to 75). So an investment of £1000 actually costs £800 if you are a nil rate or basic rate taxpayer. If you pay more than 20% tax, you get to claim the balance back via your tax returns.

The Chancellor is reviewing this, because it costs the country a lot of money. The main problem being that employers make most of pension contributions each year and do so in part because it is treated as a deductible cost. If this were considerably altered, then most employers are likely to reduce or even stop (bar the minimum requirements of auto enrolment) their contributions. This would result in smaller pensions in retirement…

So he could simply reduce tax relief to a lower amount, in essence he has done this already for anyone earning over £150,00, who have their annual allowance restricted to just £10,000 (less than an ISA) if they earn over £250,000.

Tax relief provided in 2013/14 amounted to £34.3bn, whereas the tax on pensions generated £13.1bn a “cost” to the UK of £21.2bn. Most of which (2/3rds) is reclaimed by higher rate taxpayers… those paying 40% or more.

Shrinking the Pot

He has also reduced the amount that can be held in a pension (the Lifetime Allowance) which is set to reduce again from £1.25m to £1m next April. Anything above this will be subject to an excess tax charge of 55% as things stand at present. That’s what I call easy money for the Treasury and there isn’t that much that you can do about it, other than applying for protection where relevant.

Changing the Sweetener

Another option would be to make pensions tax-free in retirement instead of taxable. Whilst this sounds all well and good, the reality is that who would honestly trust any future Government not to change the rules later, when they realise that they need the income to be taxed.

Simplicity Seems Dead

I am of the opinion that pensions are going to change, how much and when, we simply do not know. However the Government wants to be seen not to help the “rich” which seems to include people paying 40% tax and everyone paying 45% tax. It would include anyone in the State Sector that has built up a long career – doctors, teachers, police, civil servants – all of whom seem to be the current “cat to kick”. It certainly includes anyone that has pension funds worth £1m or more. Though I would argue that £1m in a pension pot isn’t that huge (yes I know its relative)  but in practice that provides at £40,000 a year income… not enough to pay higher rate tax. The worst case to my mind would be to create a “before and after” system – which we have had before, which only makes life more complicated.

If I were Chancellor?

People need an incentive to save for the long-term. I would abolish the Lifetime Allowance making all current and previous protections irrelevant. I would restrict tax relief to a % of salary, perhaps providing it directly as a 5% tax cut, say 20% tax becoming 15% if payments are made to a pension. That way HM Treasury collect taxes, people are incentivized to save and earn. I would scrap rules that enable people to pay into pensions for children, which is essentially something that only the wealthy can do, so that pensions are only for those aged 18. However I would continue to tax pension income as income…

Sadly, for younger generations the prospects of good pensions looks fragile… of course there is the prospect of the solution as outlined in Logan’s Run….. there’s just one catch..

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Taxing Reforms for Pensions2017-01-06T14:39:26+00:00
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