Closing the generational divide: tax and NIC issues
As a House of Lords Select Committee reports on inter-generational fairness, Donald Drysdale considers a number of tax and benefit changes which have been suggested.
A recent House of Lords Select Committee on Intergenerational Fairness and Provision devoted a chapter of its report, ‘Tackling intergenerational unfairness’, to various tax and related issues. There are widespread concerns about inter-generational fairness in a number of spheres, including tax and benefits.
The inter-generational contract – the principle that different generations provide support to each other across the different stages of their lives – is fundamental to society as a whole and to the role of government. But there is a sense that it is under threat.
Burdens and benefits shared
Official statistics are limited in their scope and coverage. However, they do reveal that tax imposes a net cost on taxpayers throughout their working lives. This is followed by a reversal of that trend – a net benefit – once people retire and receive their state pension at a stage when they are likely to be relying on increasing support from the National Health Service.
These life cycle variations in resources and needs are broadly in line with those envisaged in the Beveridge report of 1942, which laid the foundations of Britain’s modern welfare state. However, today’s tax and social security arrangements may not be well adapted to cope with a projected 100-year life.
Even as recently as the late 1990s, people over state pension age were among those with the lowest incomes. Since then the position has changed. Now, households over state pension age have higher incomes than those below state pension age with children, but lower levels of income than those without children.
Over time, people accumulate wealth. This is represented primarily by housing and pensions, which are not easily accessible. Those over state pension age tend to have much more wealth than those under it, giving long term personal and family security and supporting them through their retirement.
Costs of pensions, medical treatment and social care of the large ‘baby-boomer’ generation will fall on today’s smaller generation of working-age households in the form of higher taxes. Alternatively, if taxes are not increased, these costs will be added to the national debt and will fall on even younger generations and the unborn.
In the absence of specific action, costs are naturally spread across generations. However, given the uneven size of generations, this creates a concern for inter-generational fairness. As the baby boomers are an exceptionally large generation and are benefiting from longer life expectancy, the position is exacerbated but has been ignored by successive governments.
National insurance contributions (NICs) were originally paid towards security in old age, but this link no longer exists. Changes now needed are not simply about redistributing from old to young. They need to ensure that each generation contributes adequately toward the costs of the payments and services they receive.
The Select Committee recommends that the government, via the Office for National Statistics, should prioritise improving generational statistics. In this way, the relative costs and benefits of each generation would be known, and not swept under the carpet.
The current ‘triple lock’ for the state pension should be removed. Instead, the state pension should be uprated in line with average earnings to ensure parity with the working population. However, there should be protection for pensioners against any unusually high periods of inflation in the future.
Free television licences for everyone over a certain age, which are currently funded by the BBC, should be phased out. Those who can afford to pay for a TV licence should do so. The poorest may be subsidised directly by the government if it chooses to do so, but not by the BBC.
Age-related benefits should be better targeted. From 2026/28 when the state pension age is due to rise to 67, free bus passes and winter fuel payments should be available no sooner than five years after state pension age – with transitional protection for individuals who currently receive them.
The government should investigate the feasibility of treating such benefits as taxable on those above the income tax threshold. Ambitiously, and probably unrealistically, the Committee wants this done without requiring individuals who currently do not complete an income tax form having to fill out a form.
NICs no longer pay for the state pension, even though they determine eligibility for it. The Committee sees strong arguments for greater alignment and the eventual merger of NICs and income tax – although I fear that a reform of this nature is now a lost cause following devolution of income tax powers.
Today’s longer working lives should prompt a rethink of the NICs system. The Committee recommends that individuals working past state pension age should contribute to this tax – with protection for those on lower incomes by aligning their NICs threshold with the income tax personal allowance.
Council tax is described as “an incoherent combination of a property tax and a service charge”. It is regressive, falling disproportionately on lower value properties, and tends to favour older people with larger properties. If local authorities are to continue to be funded through a tax based partly on property values, then a reform of council tax is needed.
A redesigned council tax should more closely reflect property values. It should allow individuals with low incomes but high asset values to defer payment until their property is next sold or transferred. The Committee wants second homes to pay the full rate of local tax.
Stamp duty land tax (SDLT) has seriously distorted the housing market. The government should review the effect of stamp duty on the liquidity of the housing market and consider how SDLT could be reformed to improve the housing choices and availability for young families.
Surprisingly, the Committee refers only to “stamp duty” and makes no mention of the fact that SDLT has been replaced by devolved taxes in Scotland and Wales. By implication, the comments it makes could apply equally to these.
It describes inheritance tax as capricious and not currently fit for purpose. Consideration needs to be given to whether and how assets should be taxed, on death or transfer, in ways that ensure fairness between generations.
Recommendations from House of Lords Select Committees and suggestions from independent think-tanks may not always result in firm action. Nonetheless, taxpayers and their advisers should expect some inter-generational adjustments in the months and years ahead.
Changes to tax rates and reliefs, and to age-related benefits, would create winners and losers. In the short term, it is those from among the baby boomer generation who seem most likely to find themselves losing from any changes.
Article supplied by Taxing Words Ltd