With the Autumn Budget set to be unveiled on Wednesday 22 November, there has been much speculation about a proposal to redistribute the country’s wealth from the older generation to the young.
No one knows exactly how such a proposal would work, however the unconfirmed reports suggest there would be a cut in National Insurance contributions for workers in their 20’s and 30’s, which would be funded by reducing the tax relief on pensions for people approaching retirement.
Your initial reaction to this, in our current world of political correctness, may well be that this cannot possibly be introduced; it cries of ‘age discrimination’ and surely cannot be legal? However, when you stop and examine our current systems of taxation and income there are numerous examples of people paying more or less tax, based on their age:
- Until 2016 people over 65 were entitled to increased personal allowances.
- UK workers of State Pension age are not required to pay National Insurance contributions.
- The National Minimum Wage rates are dependent on age.
It is not therefore inconceivable that such an age dependant system could be introduced.
How would it work?
If the Government was to introduce such a system it would need to be fair and in achieving this, the already complicated tax system, could become extremely complex and costly to administer.
There would presumably need to be some form of means-testing involved to ensure super-rich younger workers aren’t given a bigger tax relief than older workers in less well paid jobs.
It is unclear how the Government might tinker with pension tax relief, and whether or not older savers would be the only ones affected. If the proposal goes ahead, one of the things that could be introduced is a flat rate of relief. Currently pension contributions give tax relief at the marginal rates of 20%, 40% or 45%, depending on the taxpayer’s income; this could be capped at a flat 20% relief for everyone. Alternatively, the cap of 20% relief may only be applied to older people.
Another option would be to reduce the annual allowance for those over a certain age. The annual allowance is the maximum amount people can put in their pension pot each year and get tax relief.
Would it be effective?
This very much depends on what the system is intended to achieve. There are many who believe such a dramatic change to the country’s tax system will only alienate older voters. In seeking to win back the votes of the younger population, the Government may do so at a cost of losing the votes of the older people, who are generally more likely to vote.
Others however may welcome the attempt to change how the wealth of the country is distributed. The main benefit of this would be that people would receive a greater proportion of tax relief when they are younger to enable them to save and take advantage of the compounding of investment returns.
Many believe however, that the savings achieved from cutting tax relief on pensions would be widely spread across millions of young workers, so as to have little financial impact on the younger generation.
This current controversy may well just be the Government’s attempt to ‘test the waters’ ahead of next month’s Autumn Budget, as has been seen in the past.
We will be keeping an eye on any further announcements in the run up to Wednesday 22 November and our team will be on hand throughout Autumn Budget day to answer all your questions, watch this space …
Tax is something that affects everyone, regardless of your circumstances or where you are on your life journey. Our aim at David Allen is to minimise the amount of tax you pay while keeping you fully compliant with all tax legislation. For more information telephone our team on 01228 711888.
Posted: October 25th, 2017