Merging income tax and NI

One of the more esoteric suggestions in this year’s Budget was that tax and National Insurance could be merged.There is a lot of sense in this and it has previously been considered in government circles as a way of simplifying the way government collects money from us for essential spending.

The coalition has decided to undertake a consultation on the subject later this year and we thought it might be a good idea to look at some of the key issues.

Main benefits
There can be little doubt that the current tax system – including national insurance – is highly complex. Even if we disregard corporation tax, VAT, inheritance tax, capital gains tax and so on, the basic income tax regime requires time and effort to understand. When you add in the different thresholds applying to national insurance contributions, compared with income tax, especially when age allowances are taken into account, the whole area becomes a quagmire.

For most individuals, this is not something that we necessarily have to worry about, because deductions are taken from our pay, or an accountant sorts out the niceties for the self-employed. But for employers, the calculations, each week or month, can sometimes appear Byzantine.

Unification of the income tax and NI systems could make things so much simpler for them – and less expensive, which is one of the reasons it is considered, from time to time.

Main disadvantages
It must be admitted, however, that there are also potential downsides, not least that there are some things that can be set against income tax that cannot be allowed against national insurance contributions.

Pension contributions are made net of basic rate tax relief, so the rate should arguably be increased from 20% to 32%, which ignoring threshold differences would make it tax neutral – either more tax relief might be available, or there would have to be a different rate of relief, in which case the link to income tax would be lost (and the relief subject to attrition by future Chancellors).

For employees and the self-employed alike, higher rate tax relief on pension contributions can be deducted from the tax bill, whereas national insurance contributions are unaffected by however much you put into a pension. One option may be for higher rate tax relief to be removed – something that the Treasury has long been suspected of wishing to achieve – the other would be to have special tax relief rates for higher and additional rate taxpayers.

There are also considerations relating to pension and investment income, which are not subject to national insurance contributions – nor indeed are earnings, once you are past the state retirement age – so there would need to be differential unified tax rates in such cases. Similarly, the self-employed currently pay national insurance contributions on a different basis, so unless benefits can be homogenised, contributions cannot fairly be. But then, since employers make a contribution on behalf of employees, whereas the self-employed only pay a reduced ‘employee’ rate, giving the same benefits would be unfair to employees.

Would we really be better off?
When it really comes down to it, there may be too may difficulties to allow simplification. But whatever the case, it makes sense to ensure that you maximise your personal retirement planning now, in case of any changes to tax relief later.

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.

Nothing in this article should be seen as giving individual financial advice.


Reviewing your pension

There are two occasions when it is worth reviewing your existing pension arrangements. One is just before you decide to take (or start taking) benefits and the other is just about all the time.

OK, perhaps “all the time” is a little over the top. After all, you need to earn a living in order to build up a pension fund in the first place. But the point is that it is never safe to stop reviewing your pension arrangements.

Even employers’ schemes are not investment risk proof
The number of people who are members of a defined benefit (final salary or career average) pension scheme is shrinking as employers (like the government) find that they can no longer afford to pay for the open-ended commitment that such schemes represent.

As a result, the majority of occupational schemes are moving over to the more risky (from a member’s perspective) defined contribution basis – at least for new joiners, but also increasingly for existing members for future benefits. This means that all the investment risk falls on the member, rather than the employer.

Even if you are not affected, you should be considering whether the benefits being accrued are likely to be adequate, especially if your employer suddenly goes bust. Existing rights may be protected by the Pension Protection Fund, but not future ones.

For those in defined contribution pensions, there are no guarantees, so how your pension fund is invested is vitally important to you (just the same as for those with personal pensions).

Thinking about a strategy
The majority of us today probably have personal pensions or self invested personal pensions. That means that the investment strategy is something that we need to think carefully about. It is not just a matter of wanting to select the right funds or shares to invest in.

Matters are far more complex than that because your investment strategy needs to match not just your risk tolerance, but also the way this changes over time; particularly as you approach retirement.

As we get older, we tend to become less tolerant to investment risk. This is logical, because we have less time for any reversals to be made good. As a result, many people consider moving away from equity (and other volatile) markets and move towards short-dated gilts, which can be more predictable. This can make sense for those intending to purchase an annuity, because these are driven largely by gilt yields (as well as life expectancy rates).

If, however, you are likely to use drawdown – especially the new flexible version available to those with a guaranteed lifetime income (including state benefits) of at least £20,000 a year – then the performance of gilts is of less relevance. This is because you are likely to want to remain invested in equity markets in order to give your funds the opportunity to out-perform gilts – or at least to grow sufficiently to provide your desired income without depleting the fund faster than you expect. Otherwise you might find your pension fund dwindling.

Getting advice
The point is that everyone is different. There is no one-size-fits-all solution to pension planning; and no guarantee that what was put in place some time ago – by you or an employer – remains appropriate.

Why not ask for a review of your pension arrangements today?

When it comes to looking after our retirement planning and investments, vigilance and professional advice are essential. If you are wondering what to do, contact Robert Bruce Associates for individual assistance.


Summary: You should review your pension arrangements on a regular basis, rather than just when you retire, if you are to expect a reasonable income later in life …