Tax - incoming Labour govt

[Lootman]

Rolling NI into Income tax and applying to all income (from work, from pensions, from savings, from dividends and from capital gains), with income from the last three perhaps having a minimal (say £1k) additional allowance. This would likely be combined with small upward tweaks, such as top rate to 50%.

By "rolling NI into income tax" do you mean effectively abolishing the NI system and increasing income tax rates by a corresponding amount?

That would involve changing the way that the state pension amount is computed for a start. And if the state pension is taxed at what would be a much higher rate, then wouldn't that be a huge devaluation of it?

Even if NI was kept as a separate charge, applying it to all forms of income, and to people over the retirement age who aren't working, would be a dramatic step. My response would be to leave the UK, as it would take my marginal rate of tax to over 50%. The only form of income I could not relocate is my state pension and that alone is not enough to pay tax on, under current rules.

So I really hope you are wrong about that.

[Spet0789]

Rolling NI into Income tax and applying to all income (from work, from pensions, from savings, from dividends and from capital gains), with income from the last three perhaps having a minimal (say £1k) additional allowance. This would likely be combined with small upward tweaks, such as top rate to 50%.

By "rolling NI into income tax" do you mean effectively abolishing the NI system and increasing income tax rates by a corresponding amount?

That would involve changing the way that the state pension amount is computed for a start. And if the state pension is taxed at what would be a much higher rate, then wouldn't that be a huge devaluation of it?

Even if NI was kept as a separate charge, applying it to all forms of income, and to people over the retirement age who aren't working, would be a dramatic step. My response would be to leave the UK, as it would take my marginal rate of tax to over 50%. The only form of income I could not relocate is my state pension and that alone is not enough to pay tax on, under current rules.

So I really hope you are wrong about that.

Yes, that’s exactly what I mean. Can be presented as a simplification (doing away with NI) and Labour don’t see themselves as the party of the Boomers unlike today’s Conservative Party.

While (as you know), I am a low-tax, small-state person, this is something I would support. It’s ludicrous that wealthy older people don’t pay NI given how much more use that cohort make of public services than those under 50. The tax base is far too narrow in this country. Basically the top quartile of working age earners carry everyone else. For example, if you’re a 35 year old graduate earning £100k your marginal tax rate is 69%!

I would expect the various bands to be aligned at the income tax level so pensioners on the state pension only wouldn’t be touched.

[TUK020]

For example, if you’re a 35 year old graduate earning £100k your marginal tax rate is 69%!

Marginal Tax + NI rate = 71%

[thebarns]

Graduate in Scotland, who took out maintenance loan, as virtually most do for living expenses, granted they do not pay the Uni fees.

From just under £44k - income tax, 41%, NI 12%, student maintenance loan repayment, 9% = 62% marginal rate !

And reports from Scottish media this week that the SNP are considering upping the 41% rate which we will find out next week as Honest John Swinney will let us all know how much more is needed to pay for Krankie’s speechwriters, hairdressers, SPADs, photographers etc etc etc.

At £50K, child benefit starts to taper off to zilch by around £60k.

Scottish higher rate tax is currently 46% - let’s see what they do with that, will want to outdo Hunt’s recent attack on those earning over £125k.

[AF62]

Also restricting pension relief to the basic rate creates significant difficulties with defined benefit schemes and one could foresee a situation where a high paid employee in a DB scheme has most of his/her pay clawed back because of the tax charge on the increased valued of their pension asset. Sir Humphrey won't like that!

Not sure why you would think it would cause the difficulties you think.

The valuation of the DB pension wouldn’t change if the employee contribution was restricted to the basic rate - the employee would just have some more tax to pay, but that amount would be relatively small.

[88V8]

Given the share price drops by the dividend amount on XD date, you are no better off holding on for the dividend.

Actually the price would have been "pregnant" with the dividend

In theory.
But with market noise, often it doesn't work out that way.

V8

[pje16]

Actually the price would have been "pregnant" with the dividend

In theory.
But with market noise, often it doesn't work out that way.

V8

The theory is still true though

[scrumpyjack]

Also restricting pension relief to the basic rate creates significant difficulties with defined benefit schemes and one could foresee a situation where a high paid employee in a DB scheme has most of his/her pay clawed back because of the tax charge on the increased valued of their pension asset. Sir Humphrey won't like that!

Not sure why you would think it would cause the difficulties you think.

The valuation of the DB pension wouldn’t change if the employee contribution was restricted to the basic rate - the employee would just have some more tax to pay, but that amount would be relatively small.

It is not a question of the employee contribution. With a DB pension scheme there may be no employee pension contribution because the employee does not have a pension 'fund' or the employee may pay a small contribution and the employer pays the rest. Rather the pension scheme has a liability actuarially calculated which can change substantially, hence companies can be bankrupted by the eventual cost. I am no expert on this but I understand it can be a minefield. I think a notional calculation has to be made of the value of the change in benefit entitlement.

https://www.mandg.com/pru/adviser/en-gb ... calculator

[AF62]

Not sure why you would think it would cause the difficulties you think.

The valuation of the DB pension wouldn’t change if the employee contribution was restricted to the basic rate - the employee would just have some more tax to pay, but that amount would be relatively small.

It is not a question of the employee contribution. With a DB pension scheme there may be no employee pension contribution because the employee does not have a pension 'fund' or the employee may pay a small contribution and the employer pays the rest. Rather the pension scheme has a liability actuarially calculated which can change substantially, hence companies can be bankrupted by the eventual cost. I am no expert on this but I understand it can be a minefield. I think a notional calculation has to be made of the value of the change in benefit entitlement.

https://www.mandg.com/pru/adviser/en-gb ... calculator

Certainly a calculation is made in respect of the value of DB pension for the employee, in order to deal with the Annual Allowance and the Lifetime Allowance, but restricting pension relief to the basic rate will have no impact on either of those.

As for the cost of the scheme - again that isn’t impacted by restricting tax relief on the employee contribution to the basic rate - any additional tax is paid by the employee not the employer.

So yes Sir Humphrey will have to pay more tax on their relatively small employee contributions, but that would be small beer compared to the amount Dave, the high earning software engineer, would have to pay in respect of his much larger contributions into his DC scheme, particularly if the ability to salary sacrifice was removed (and as Sir Humphrey cannot salary sacrifice then he wouldn’t care about that).

[Alaric]

So yes Sir Humphrey will have to pay more tax on their relatively small employee contributions, but that would be small beer compared to the amount Dave, the high earning software engineer, would have to pay in respect of his much larger contributions into his DC scheme

If we assume Dave to be a higher rate tax payer, the disincentive to putting money aside for retirement comes if his contributions and investments do well enough so that he remains a higher rate tax payer in retirement. Assuming no 25% tax free lump either, the equation is that he's putting in 80, the governement adds 20. When he comes to take the 100 out he's hit for tax of 40 or more.

[Lootman]

So yes Sir Humphrey will have to pay more tax on their relatively small employee contributions, but that would be small beer compared to the amount Dave, the high earning software engineer, would have to pay in respect of his much larger contributions into his DC scheme

If we assume Dave to be a higher rate tax payer, the disincentive to putting money aside for retirement comes if his contributions and investments do well enough so that he remains a higher rate tax payer in retirement. Assuming no 25% tax free lump either, the equation is that he's putting in 80, the government adds 20. When he comes to take the 100 out he's hit for tax of 40 or more.

A big part of why I always preferred ISAs to pension plans. Plus the fact that you can liquidate them in a day and quickly move the value outside of UK jurisdiction. Whilst pensions are eternally locked into being UK taxable income and a hostage to UK politics.

Given that for long periods of time I could control my receipt of income, and therefore limit my tax liability, I always preferred PEPs and ISAs.

I expect that after 40 years of consistent tax policy, I am now going to have to change my tax strategy. Irksome, annoying and not even good for the nation.

[paulnumbers]

Wouldn't that simply make pension uneconomical for basic rate tax payers. I'm not sure about you, but I wouldn't invest in a pension for zero benefit.

Perhaps but that is one tax break that I have never understood the rationale for.

To make it worthwhile for basic rate tax payers.

[scrumpyjack]

If we assume Dave to be a higher rate tax payer, the disincentive to putting money aside for retirement comes if his contributions and investments do well enough so that he remains a higher rate tax payer in retirement. Assuming no 25% tax free lump either, the equation is that he's putting in 80, the government adds 20. When he comes to take the 100 out he's hit for tax of 40 or more.

A big part of why I always preferred ISAs to pension plans. Plus the fact that you can liquidate them in a day and quickly move the value outside of UK jurisdiction. Whilst pensions are eternally locked into being UK taxable income and a hostage to UK politics.

Given that for long periods of time I could control my receipt of income, and therefore limit my tax liability, I always preferred PEPs and ISAs.

I expect that after 40 years of consistent tax policy, I am now going to have to change my tax strategy. Irksome, annoying and not even good for the nation.

Don't assume you will be able to move it out of the UK. I well remember the exchange controls in my youth when there was a £50 limit to what you could take abroad! If Labour really are going to screw down on taxes they may well have to bring that sort of thing in again to stop wealth fleeing abroad.

[1nvest]

If we assume Dave to be a higher rate tax payer, the disincentive to putting money aside for retirement comes if his contributions and investments do well enough so that he remains a higher rate tax payer in retirement. Assuming no 25% tax free lump either, the equation is that he's putting in 80, the government adds 20. When he comes to take the 100 out he's hit for tax of 40 or more.

A big part of why I always preferred ISAs to pension plans. Plus the fact that you can liquidate them in a day and quickly move the value outside of UK jurisdiction. Whilst pensions are eternally locked into being UK taxable income and a hostage to UK politics.

Given that for long periods of time I could control my receipt of income, and therefore limit my tax liability, I always preferred PEPs and ISAs.

I expect that after 40 years of consistent tax policy, I am now going to have to change my tax strategy. Irksome, annoying and not even good for the nation.

But isn't that what Labour always do, increase taxes and change policies that push the 1% that pay 33% of the income tax take ... away to elsewhere, leaving the rest having to pay 50% more in taxes to fill that hole. Oh hang on! What do you mean this isn't a current Labour government!!

The rules have been progressively changed over time in preparation for the flight of money. 100+ countries all liaising to ensure whatever the UK want to confiscate from you still remains accessible no matter where in the world you might try to invest your wealth. After all its not really your wealth, just a loan, callable at any time.

The only recourse nowadays is to join the millions of equally minded - to up and leave and after a handful of years you'll be free from its confiscatory policies/practices. Providing as other have said they don't bind you to a ball-and-chain (exchange controls).

[Lootman]

A big part of why I always preferred ISAs to pension plans. Plus the fact that you can liquidate them in a day and quickly move the value outside of UK jurisdiction. Whilst pensions are eternally locked into being UK taxable income and a hostage to UK politics.

Given that for long periods of time I could control my receipt of income, and therefore limit my tax liability, I always preferred PEPs and ISAs.

I expect that after 40 years of consistent tax policy, I am now going to have to change my tax strategy. Irksome, annoying and not even good for the nation.

Don't assume you will be able to move it out of the UK. I well remember the exchange controls in my youth when there was a £50 limit to what you could take abroad! If Labour really are going to screw down on taxes they may well have to bring that sort of thing in again to stop wealth fleeing abroad.

I remember that too. In the back of my first passport was a section where your FX purchases had to be recorded, and there were limits to how much you could buy.

As I recall Corbyn and McDonnell ran war room scenarios about how they would shut down the export of capital possibly on day one of a Labour government if they won.

It would not be a good look for Starmer to feel that he had to do that, so there should be time.

[1nvest]

Not much different to a swelling tax rule book that even blocks how much you can gift of your own money to someone else without incurring taxation. Usually there are ways around it, at least until the rule-book is further extended. Such as being able to gift £250 to as many separate individuals as you like - so you just need a syndicate of 1000 that you individually gift £250 to each of, and who in turn each gift £250 to your son/daughter. Or go to the Ritz Casino one evening, wire £250,000 into the cashier in exchange for chips, and bet your daughter £250,000 of chips that the next colour on the roulette table will be blue, and when it turns up red, black or green hand over the chips and she can cash those in and ask for the money to be wired to her account.

[thebarns]

Another area that I can see Labour considering, although very hard to police properly.

I think I was at University when the 7 year rule for gifting was brought in and at the time we were being taught about it, I thought it was an incredibly arbitrary pot luck nonsensical type of rule/exemption.

I appreciate some years before this capital transfer taxes were in operation and I wonder if Labour might consider this - I have seen it mentioned in some think tank papers on IHT and think changes had been mooted around the time of the Corbyn era.

But I never really got my head around the fact that, for example, a 70 year old could choose to gift a sizeable sum/assets, a significant proportion of their estate to their children or whomever and then be taxed either zilch, if they live another 7 years, 40% if they die within 3 years, or something in between if they die between 4 and 7 years - it is just sheer pot luck and completely devoid of any real rational thought.

So I think this IHT Rule, which has been around since 1986ish, if memory serves me properly, is rife for attack/change.

Of course as I said, there would be all sorts of problems trying to monitor this properly should some form of maximum gift allowance be brought in, which is linked to amount given away rather than length of period from when it was given.

[Lootman]

there would be all sorts of problems trying to monitor this properly should some form of maximum gift allowance be brought in, which is linked to amount given away rather than length of period from when it was given.

I don't know how capital transfer taxes worked back when they were a thing. But under current rules gifts do not have to be declared (except retrospectively if you die within 7 years) and so it would require a major change versus simply increasing existing taxes: Brand new taxes are a lot of work to implement and enforce. Ditto for a wealth tax of course.

There would be obviously difficulties for the authorities trying to track down gifts that do not involve a paper trail e.g. gifts of cash, diamonds, gold, collectables, jewellery, art and any gifts made overseas or of overseas assets.

That said anyone worried about this might be advised to make gifts prior to the next election, just in case.

[1nvest]

there would be all sorts of problems trying to monitor this properly should some form of maximum gift allowance be brought in, which is linked to amount given away rather than length of period from when it was given.

I don't know how capital transfer taxes worked back when they were a thing. But under current rules gifts do not have to be declared (except retrospectively if you die within 7 years) and so it would require a major change versus simply increasing existing taxes: Brand new taxes are a lot of work to implement and enforce. Ditto for a wealth tax of course.

There would be obviously difficulties for the authorities trying to track down gifts that do not involve a paper trail e.g. gifts of cash, diamonds, gold, collectables, jewellery, art and any gifts made overseas or of overseas assets.

That said anyone worried about this might be advised to make gifts prior to the next election, just in case.

But you have to pay capital gains on gifts, excepting if within the allowances/conditions exempting such. As though they were disposed of at market value. Relief can apply in some limited cases, where the individual giving the gift in effect has no capital gain, but the receiver has to pay capital gains relative to the original cost when they dispose of it, not the value at time of having received the gift. So in part a 'declaration'.

https://www.taxinsider.co.uk/how-to-avo ... en-gifting

[Eboli]

Lootman noted:

I don't know how capital transfer taxes worked back when they were a thing. But under current rules gifts do not have to be declared (except retrospectively if you die within 7 years) and so it would require a major change versus simply increasing existing taxes: Brand new taxes are a lot of work to implement and enforce. Ditto for a wealth tax of course.

The curiosity was IHT was grafted onto CTT (Capital Transfer Tax) in 1986 by FA1986 adding provisions to CTTA 1984 which, incidentally, explains why the CTT allowances - such as, e.g., the £250 for any gift, £3K annual and the £1K-£5K in consideration of marriage - have never been increased. These CTT allowances were intended to waste away under the IHTA regime that had no limit to gifts and assumed virtually all transfers were potentially exempt. But that is also the weakness (for us, at least) of the IHTA regime - it is a simple matter (relatively in tax terms) to revert it back to CTT by abolishing the relevant provisions of FA 1986 and a few provisions inserted thereafter.

Under CTT there was a lifetime threshold that applied to the cumulative total of gifts made in a 7 year period. So all transfers of value were not potentially exempt, they were chargeable. Once you exceeded the threshold you paid the lifetime rate of tax and then, in addition paid the difference between the death and lifetime rate if you died within 7 years of the gift. This is best explained by a simple example.

Suppose the lifetime threshold is the same as the death rate nil-rate band (£325,000). You then make, on the 6th April, each tax year a gift of £100,000 to the same individual (or different individuals, it matters not). You start this gifting in 2020 and die on 5th April 2030. Ignoring the annual allowances for simplicity and the complications of 'grossing up' by assuming the transferee pays the tax, the position is as follows:

A. Under IHTA, each gift is potentially exempt and can be ignored until death. Then gifts made in the 7 years before death become taxable seriatim. Thus gifts of £100K made 6th April 2023, 2024, 2025, 2026, 2027, 2028, 2029 all become taxable. The nil-rate band is applied to the three gifts 6th April 2023, 2024 and 2025 in full and the last £25K is applied to the gift made on 6th April 2026 leaving £75K of that gift taxable. Taxable in full are the gifts made 6 April 2027, 2028, 2029. The tax on the gift made 6th April 2026 is £24,000 (i.e., 32% as the gift is over 3 years but less than 4 years before death). Tax on each of the other taxable gifts (6th April 2027, 2028, 2029) is £40,000 each. Total tax is thus £144,000 payable on 31st October 2030.

B. Under CTT the first three gifts when cumulated fall below the lifetime threshold and are free of tax when made. The fourth gift made on 6th April 2023 becomes taxable to the extent the cumulation exceeds the lifetime threshold at the lifetime rate (20%) = £75K @ 20% = £15,000. Then each of the gifts made thereafter is taxable in full at the lifetime rate, so £20,000 tax on the gifts made 6th April 2024, 2025, 2026, 2027, 2028 and 2029. Lifetime tax total is thus [(6 x £20,000) + £15,000] = £135,000. On death additional tax become payable on gifts made with the last 7 years but only if the death rate exceeds the lifetime rate. This occurs in 2025 (24%) = £4,000 extra tax; 2026 (32%) = £12,000 extra tax; and each of the years 2027, 2028, 2029 have a 40% death rate so £20,000 extra tax each year. The total death tax is thus [(3 x £20,000) + £12,000 + £4,000] = £76,000. Total tax is thus £135,000 + £76,000 = £211,000 (i.e. about 46% more than under IHTA in this example). Note in addition £135,000 will have been payable before death.

Eb.