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Should pensioners pay more tax for a fairer financial system?

Find out how your retirement income could be affected

Should pensioners pay more tax for a fairer financial system?

People working beyond state pension age should continue to pay National Insurance contributions, a new report aiming to improve generational inequality has suggested.

The money raised – a projected £2.3bn – would fund a new NHS levy to support the rising care costs of the older population.

The report, ‘A New Generational Contract’ published by non-partisan UK think-tank Resolution Foundation, looks at inequality between generations and how this gap could be corrected.

Which? looks at what this proposed measure could mean for those who work beyond the state pension age.

How do National Insurance payments currently work?

As it stands, if you’re aged 16 or above and earning money from employment or self-employment, you’ll pay National Insurance contributions.

There are four ‘classes’ of National Insurance payments – the class you pay depends on your employment and how much you earn.

Employees pay Class 1 contributions, which equate to 12% on earnings above £8,424 and £46,356 a year, and 2% on anything more.

If you’re self-employed, there are two types of contributions to pay.  You’ll pay Class 2 contributions if you earn more than £6,205 profits per year, which are charged at £2.95 per week, or £153.40 for the year.

You’ll pay Class 4 contributions on profits above £8,424 per year at 9%. This rate falls to 2% on profits above £46,350 per year, in a similar fashion to Class 1 contributions for employees.

These contributions go towards your state pension eligibility. Once you reach that age, you no longer have to pay National Insurance contributions, unless you’re self-employed and earning enough to pay Class 4 contributions.

In this case, you’ll carry on paying Class 4 National Insurance on the taxable profits from the year you reach state pension age. From the next year, you’ll also be exempt.

How much extra tax could I pay?

Under the Resolution Foundation proposal, people earning an income from employment after they hit state pension age would need to continue paying National Insurance.

Currently, people of state pension age stop paying National Insurance contributions.

After state pension age, if you’re in employment and earning £30,000 a year, you’ll pay £3,630 income tax under the current rules. This means you would take home £2,197.50 a month.

If you were also liable for National Insurance, you’d have to pay an additional £215.76 a month, so you’d only take home £1,981.74 – amounting to a an annual tax hike of £2,589.12.

The Resolution Foundation claims that some 80% of the funds would be drawn from the richest fifth of pensioners under its proposal. But lower earners would be affected, too.

On an income of £18,000, a worker over state pension age would currently earn £1,397.50 a month after taxes. If you needed to pay National Insurance, that would add an extra £97.50 a month to your bill – leaving you with take-home pay of £1,307.74.

You can run your own calculations using our income tax calculator.

Self-employed workers would also be liable to continue paying National Insurance contributions.

Tax contributions on workplace pensions

Within its report, the Resolution Foundations also proposed adding an additional charge – similar to National Insurance contributions – on workplace pension income.

Pensioners already pay income tax on state and private pension income above the personal tax allowance (£11,850 for 2018-19 tax year). These tax contributions would target the pre-tax pension savings made by employees while working, and topped up by their employer.

Initially, this tax would be at a lower primary rate (6%) with a higher tax-free threshold than the personal tax allowance in order to minimise the likelihood of being taxed twice.

So, for example, if you have taken out a workplace final salary pension and receive £30,000 a year, you’d have to pay an additional 6% in tax on earnings over £11,850. This would equate to extra tax of £90.75 a month.

How might pensions change in the future?

Which? exclusively interviewed Pensions Minister Guy Opperman on the future of retirement earlier this year.

When asked whether pensioners were likely to have to pay National Insurance in future, Mr Opperman confirmed that was not on the cards, stating that: ‘the law is utterly clear and there is no change to that. It is the working population paying for the state pension on an ongoing basis.’

The video below shows his answers to Which? members’ questions.

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