21 February 2023
This article in a recent edition of Weekly Tax Brief considered whether increasing knowledge of or expanding capital gains tax reinvestment reliefs would encourage entrepreneurs currently spending their Mondays on the golf course to consider putting their latest lightbulb idea into action. However, not all over-50s fall into this category – many are simply those that have saved well over the years, contributed consistently into their pension plans and paid off their mortgages, providing them with the opportunity for an early retirement. So, what might we see in the fast-approaching Spring budget designed to entice them back?
The headline commentary understandably focuses on creating a more favourable tax regime for pensions, specifically reducing the amount of tax levied on a healthy sized pension plan that exceeds the lifetime allowance – currently 55% for lump sum drawdowns or 25% plus the member’s marginal rate of income tax for income drawdowns over the £1,073,100 limit.
In further support of this general consensus, in early February we had the Institute for Fiscal Studies (IFS) call for an overhaul of the pension tax system, which it claims provides older workers with “ridiculously strong disincentives to work more”. As a starting point, the IFS has called for the lifetime allowance to be based purely on the value of contributions made to a pension plan, rather than the total value of pension assets at retirement.
Whilst implementing the above quasi-tax cut could be seen as a carrot, there are also various rumours swirling of a more ‘stick’ based approach – namely an increase to the state pension age. This is currently set at 66, with gradual increases to 67 by 2028 and then up to 68 between 2044 and 2046. However, bringing forward the increase to age 68 could free up some significant funds for the Treasury; similarly, any tinkering with the increase to 67 could cause those currently out of work over-50s to review their financial position and perhaps question whether they can realistically afford to wait any longer to access their state pension or if their current capital reserves might well dry up by then – effectively forcing them back towards the workplace.
An additional strategy that the chancellor may look to deploy is targeted tax relief for over-50s. It is generally accepted that far-ranging tax reliefs benefitting all taxpayers are unlikely in the near future as the chancellor will be keen to avoid fuelling the fire of inflation. But something targeted at the over 50s, for example an increased income tax personal allowance, which could allow for more income to be received tax free by those who qualify, could perhaps encourage them to look again at their employment (or self-employment) status. The main issue to resolve with this approach would be to ensure that the tax relief broadly benefits those with incomes under £100,000, rather than very high earners.
Whichever strategy the chancellor rolls out to solve his productivity puzzle, it is crucial that he understands and empathises with the target market, as it is essential that he makes them feel tempted back to work rather than held to ransom.