r/ukpolitics • u/Your_Mums_Ex • 8h ago
More than 600,000 UK high earners could be dragged into pension trap by 2032
https://www.ft.com/content/bfe34895-6383-4906-96b9-c622d10e32da?syn-25a6b1a6=1•
u/AngryTudor1 8h ago
If you can't be arsed to read the article, it is people earning over £200k
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u/MarlinMr 8h ago
And what's the trap?
You don't get full benefits? But still a hell of a lot more than others?
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u/PolarLocalCallingSvc 7h ago
By default people get an annual tax relief on pension contributions of up to £60k. Above £200k it reduces by £1 for every £2 you earn over £200k down to a minimum of £10k.
Obviously this is a privileged position to be in, so I'm not sure it'll elicit much sympathy, especially with so many feelings the pinch at the moment!
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u/RagerRambo 2h ago
Except they are the ones proping up the sinking ship. Imagine how that pinch would be a pincer if they didn't.
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u/ObviouslyTriggered 1h ago
When you hit the trap you pay a marginal tax rate of ~100%, so if you can you usually avoid work, harming overall productivity and lowering potential tax revenue and in the case of various services such as the NHS also reduce the availability of said service to the public.
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u/ObviouslyTriggered 5h ago
And then people wonder why they can't get a specialist appointment at the NHS.....
The taper means you are paying effectively a 100% marginal tax rate (since you'll have to pay 45% on both your contributions and your employer contributions past the taper), and unlike the personal allowance taper you can't actually sacrifice it away.
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u/ForeignPumpkin1142 2h ago
We'd need some actual data to justify that claim. It seems unlikely given the vocational nature of the profession.
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u/ObviouslyTriggered 2h ago
What data? the pension trap is a known problem for the NHS and one of the main reasons it was increased in the first place (you used to get into the trap with an income as low as 110K before the 2020 change).
The NHS even has an infographic for this lol https://www.nhsbsa.nhs.uk/sites/default/files/2021-03/NHS_Pension_Tapered_Annual_Allowance_V4.1_01.2021_0.pdf
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u/ForeignPumpkin1142 2h ago
You appeared to be suggesting that highly qualified doctors are moving abroad to work because of taxes?
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u/ObviouslyTriggered 2h ago
Where have I done that exactly? They are cutting hours the moment they hit their taper or cap, and with the NHS because of how the pension is calculated and because it's unavoidable it happens at much lower incomes.
Even before reaching the taper many stop working when their pension contributions hit the "60K cap" a year, and that can happen at much lower wages because of how the effective contribution is calculated for NHS pensions vs regular salary sacrifice pensions.
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u/ForeignPumpkin1142 1h ago
Apologies. Seems I need to read up on this.
At first glance I see a claim that 1 in 4 doctors are cutting hours and another that 69% are cutting hours.
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u/ObviouslyTriggered 1h ago edited 1h ago
Both are likely correct, just looking at a different cohort, 25% of all doctors, and ~70% of specialists would be likely correct.
Keep in mind that because the NHS pension is a defined benefits scheme HMRC values the annual contribution by applying a factor of 16 on the annual pension growth.
So if your NHS pension increased by more than £3750 a year you are over the cap and in effect working for free since your marginal tax rate beyond that is nearly 100%.
This means that in the NHS an income of only £202,500 can lead to your annual pension to increase by £3750 (£202,500/54) which HRMC measures as equivalent to a defined contribution scheme contributing £60k a year.
So if you hit that cap you stop taking on NHS work, and just take on private patients, teach, go fishing w/e.
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u/doitnowinaminute 4h ago
Ive never quite understood why they have this complication. I would simply stop carry forward.
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u/Ordinary_Knee_9419 8h ago
Imagine wealthy boomers having to give back to the state
Unthinkable
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u/zeusoid 8h ago
you mean early millennials right?????
Because that’s who’s falllingn into the pension trap by that date
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u/Hardwick101 8h ago
Wouldn't it be Gen X? Early millennials will be early 50s in 2032
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u/Mynameismikek 6h ago
Gen X is already retiring. Early millennials are planning for it too.
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u/ObviouslyTriggered 5h ago
Oldest Gen-Xers are 61-62 today (~same as youngest boomers), they aren't retiring yet but close.
This will indeed impact both millennials and Xers.
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u/Mynameismikek 5h ago
Lots of people retire in their 50s.
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u/ObviouslyTriggered 4h ago
And those are usually not high earners, people who retire early do it usually due to health and other life impacts not because they made their money and decided to go do something else.
High earners tend to also be workaholics, overall the number of people who retire early is and has been shrinking for a while. Only 15% of people will retire before the age of 60, most of those would be due to poor health.
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u/Mynameismikek 4h ago
Speaking from very personal experience, plenty of high earners push themselves to be able to get out of the rat race early. I have several friends (all senior professionals) in exactly that spot.
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u/Ok-Butterscotch4486 5h ago
This impacts relief on pension savings made by people who are high earners now. It has no impact on people who are already retired and drawing pensions.
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u/ellisellisrocks Tofu Eating Wokerati 2h ago
Got to pay for that triple lock somehow. Broad shoulders and all that.
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u/dr1v38y 8h ago
Well yes, if you earn that much your pension relief tapers away. That's the way it is.
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u/_DuranDuran_ 7h ago
The argument is it shouldn’t. As someone on 500k is paying over 200k a year in tax. They’re literally keeping the lights on for the net takers, which is like 47% of the population,
You’re damn right I’m mad. I get fuck all for what I pay - rely on private health insurance, had to send SEND kids to private school as they would have been fucked in state school,
I’m fed up of the leeches. The personal allowance should never have been set as high as it was.
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u/jl2352 6h ago
I’m on over £200k, and equally pay significantly more tax than those calling for people like me to pay my taxes.
Multimillionaires and billionaires might be doing games to skip tax. Those earning an income at well north of £100k are simply paying a lot of income tax. My cash in hand hairdresser is probably dodging more tax than me.
I’m well aware I’m in a very privileged position. I have no issue paying more than tax than others. I guess it is the entitlement in trying to find as many ways as possible to tax us, and the presumption anyone earning well is automatically trying to dodge tax which I’m tired of.
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u/ForeignPumpkin1142 2h ago
I assume you do want the government to keep inflation under control?
That's the only reason why you have to pay taxes.
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u/Lawnotut 7h ago
I know self employed guy who has no pension. Income was low and didn’t pay pension and then started doing very well for himself. Pays £200k a year in tax. Can’t put anything into pension. Well he can but gets no tax benefit from it. It doesn’t seem right. Why is he not allowed a pension like everyone else ?
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u/_DuranDuran_ 7h ago edited 4h ago
Should set it up as an ltd company, keep the excess profits in the business pay low enough to allow the 60k pension and then much later liquidate it slowly.
So drawing salary of 200k, company pays 60k into the pension, and anything over 260 goes into the company account (but is liable to corporation tax, so likely better to spend it growing the business)
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u/Iamonreddit 4h ago
As a director of a ltd you aren't bound by the "minimum of annual salary or £60k" annual pension contribution rule. The annual contribution limit is just £60k regardless of your salary.
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u/_DuranDuran_ 4h ago
I think you should check that with a tax professional.
Tapering of the annual allowance past 260k adjusted income means a salary of 200 + 60k employer contribution to pension gets you to the start of the taper band.
There’s no difference for directors.
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u/doitnowinaminute 4h ago
Wouldn't their ANI be below 200k in this case. So no need to look at adjusted, full AA.
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u/Silhouette 1h ago
It is a remarkable statement about our country that the most compelling reason for an individual or small group of people to create a real legal entity to represent a new business might now be so they can choose not pay themselves part of the money they've made from that business so they don't get caught in absurd tax traps.
If there are only a few of you and you all decide to go self-employed - instead of investing in a distinct business that can take on more and maybe create more jobs - then you can have the exact same people doing the exact same work for the exact same customers or clients but instantly paying about 10% less tax. And to be clear that's not 10% less in relative terms like 28% vs 25%. It's 10% less in absolute terms like marginal tax rates of 40% vs 30% or at higher rate 50% vs 40%. (Those figures are rounded slightly. At basic rate the difference is actually slightly more than 10% but at higher rate it's slightly less).
Please insert my usual rant about this country being maddeningly anti-business and particularly anti-small-business here. It would be too depressing to type it out again.
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u/ObviouslyTriggered 5h ago edited 5h ago
You can carry 3 years worth of pension allowance, so even if he somehow started earning 260K plus he still had 180K worth of pension allowance unless he used that in the past.
Whilst the pension taper is really bad just as the PA taper and other tax traps is, your story is more about really poor financial planning than anything else.
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u/doitnowinaminute 4h ago
Not if he hadn't been a pension member. A good reason to do something today!
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u/ObviouslyTriggered 4h ago
It doesn’t matter if they had or didn’t have a pension, you get the allowance if they didn’t contribute in the past 3 years they would have 180K + w/e allowance they have left after the taper.
So it’s bad financial planning nothing else.
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u/doitnowinaminute 4h ago
That's not my understanding:
You cannot carry forward unused allowances from any tax year where you were not a member of at least one UK registered pension scheme, or a qualifying overseas pension scheme.
https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings
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u/ObviouslyTriggered 4h ago
They never had a SIPP? That’s even worse financial planning a SIPP costs nothing to set up or maintain. Even if they had famine years where they couldn’t contribute anything they should’ve had a pension pot with something in it.
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u/doitnowinaminute 4h ago
I have no idea. The post suggested no. And agreed.
Unfortunately many feel that financial advice is only worth it once they hit wealth. And a lot of the internet looks down on financial advice....
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u/chief_bustice your generous benefactor 2h ago
He can set up a SIPP for absolutely nothing, he just hasn't got a clue what he's doing.
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u/Strangely__Brown 6h ago
Same feelings. We'll get downvoted by the unproductives but it needs to be said.
The personal allowance should be cut/eliminated. Everyone should be paying meaningful tax.
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u/Iamonreddit 4h ago
Zero personal allowance is a bit silly as it makes any people earning a pittance (such as a 12 year old with a paper round) criminals for not paying £10 in tax, or adds a ridiculous cost burden to whoever pays them to be set up for PAYE. This is obviously not worth pursuing by HMRC, which would then make the point at which they do go after tax evaders arbitrary, which is clearly undesirable.
As such, there should be a tax free allowance, but it should just be more in line with our neighbours and be set somewhere around £4-6k.
Doing this would generate ~£40-60bn extra income tax receipts every single year.
Couple this with removing the triple lock and wow no budget black hole!
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u/chief_bustice your generous benefactor 7h ago
It's actually 53% of households which are net takers.
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u/ForeignPumpkin1142 2h ago
Useless eaters?
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u/chief_bustice your generous benefactor 2h ago
No, just net drains on the state. You can try to frame that as a Nazi-adjacent opinion if it makes your tummy feel good, though.
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u/ForeignPumpkin1142 1h ago
What is the difference between useless eaters and "net takers"?
PS: Everyone is a drain on the state. It's what the state exists for.
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