A couple of pension titbits
Now that Scottish Rate of income tax (SRIT) has been passed, Mark will look at a particular quirk between the devolved and non-devolved powers to highlight the highest UK rate of tax.
The highest rate of tax in the kingdom
Following on from my article last month on SRIT, the Scottish Rate Resolution was passed. I promise that this should be my last article on the subject, but given where I live it’s a subject close to my heart.
As detailed last month the new rates only apply to non-savings non-dividend (NSND) income. So things such as the personal allowance, dividend income, bond gains etc. will be taxed on the rest of the UK (rUK) rates.
Another non -devolved power is National Insurance (NI), and it’s this that gives rise to a tax rate that seems to hit those with modestly high incomes more punitively than the so called “fat cat” additional rate of tax for those with adjusted net income over £150,000.
For rUK,the rate at which an individual moves from paying 12% NI to 2% NI (the upper earnings limit (UEL)) is aligned with the higher rate threshold for rUK. You move to 2% NI when you move to 40% tax at £46,350.
But for the SRIT taxpayers you move into higher rate tax from £43,430 onwards, assuming that there is no loss of personal allowance. Higher rate tax under SRIT next year is 41%. So on the basis that you treat NI as a tax (which seems to be the populist view) then when you start paying higher rate tax in Scotland you are below the UEL. This gives rise to a 53% tax rate between £43,430 and £46,350, is this a tartan tax trap? While this may only be a 53% tax on £2,920 of earnings, it does have the net effect of £292 paid more in NI owing to the UEL in Scotland not being aligned with higher rate tax.
When you compare this to the Top Rate of tax (the new name for additional rate tax in Scotland) taxpayers, they will pay 46% tax and 2% NI, so they will be receiving 52% of their earnings after taxes as opposed to those in the tartan tax trap where they receive 47% of their earnings, in essence the Revenue is making more from their work than they are.
While pension contributions may now be more attractive in 2018/19 for SRIT higher rate taxpayers (as they will be able to reclaim 21% on their tax return as opposed to 20% for rUK), a normal pension contribution is still subject to NI, so the effect of making a contribution in the £2,920 band means that you will have a net loss compared to rUK.
While a pension contribution will mitigate the effect of this, the only true way to avoid this would be a salary sacrifice arrangement, but for those earning well above this, the level of sacrifice needed may be unaffordable.
The Single Financial Guidance Body
On the 26 February, Guy Opperman published a letter that he has sent to staff that work for the Pensions Advisory Service, Money Advice Service and Pension Wise. This was in response to the proposals in the Financial Guidance and Claims Bill and detailed his view on how the new single financial guidance body (SFGB) should operate.
Broadly the bill set out the functions and objectives of the SFGB
pensions guidance - to provide members of the public with information and guidance on matters relating to occupational and personal pensions
debt advice - to provide information and advice on debt to members of the public in England
money guidance - to provide information and guidance designed to enhance people’s understanding and knowledge of financial matters, and their ability to manage their own financial affairs
a strategic function - to support and co-ordinate a national strategy to improve financial capability, ability of people to manage debt, and the provision of financial education to children and young people.
The SFGB will also be responsible for providing advice and assistance to the Government on any of these matters.
to improve the ability of members of the public to make informed financial decisions
to support the provision of information, guidance and advice in areas where it is lacking.
to secure that information, guidance and advice is provided to members of the public in the clearest and most cost-effective way (including having regard to information provided by other organisations).
to ensure that information, guidance and advice is available to those most in need of it (and to allocate its resources accordingly).
to work closely with the devolved authorities as regards the provision of information, guidance and advice to members of the public in Scotland, Wales and Northern Ireland.
Some aspects of the bill have been headline grabbers, such as a ban on pensions cold calling and providing tighter monitoring/regulation of claims’ management firms.
So while this all seems to be a fairly standard amalgamation of the three bodies, some of the pleasing aspects that were highlighted in the letter was that guidance will be expanded out to all stages of people’s lives rather than the restrictions that apply at present. Crucially this will include the younger generations and the self-employed. While auto enrolment has led to more younger people starting pension funding earlier, funding a pension with no aim of what you are hoping to achieve may eventually prove fruitless. As we know, the sooner you start funding to achieve an aim the less it should cost. I know that I would like the ability to talk to my younger self and perhaps some of the money that I squandered in my youth would be working a lot harder for me now. In addition, help for the self-employed has also been a concern, as while they may be doing well in business as self-employed individuals, are they aware of the impacts on the state pension and how they can fund for their retirement?
The SFGB will have power over how to deliver its functions, and refine its approach over time. Given the wider scope this is likely to be an evolving service.
But hopefully through the above and the focus on financial education, this should help people to ensure that they have sufficient funding for their retirement. But the proof will be in the pudding and that will take years to ascertain if the pudding is as sweet as we hope.