THE Prime Minister and Chancellors drive to encourage 600,000 early retirees – those in their 50s or older – who have not returned to work after Covid is doomed to failure unless there are fundamental changes to the UK tax system, say leading tax and advisory firm Blick Rothenberg.
Robert Salter, a tax services director at the firm said: “Whilst such Covid retirees are generally quite well-off, they are typically quite highly-skilled and could certainly continue to offer the UK economy a lot in terms of their skills and experience.”
He added: “Despite these attributes, however, decisions by these early retirees to retire early have been driven in many cases by the flaws and problems within the UK tax system. Moreover, these systemic flaws in many cases will discourage people from fully re-entering the UK labour market in future.”
Robert said: “The UK pension rules pro-actively encourage those with a strong pension fund (or those who benefit from a final salary scheme) from continuing to work. The so-called ‘lifetime pension allowance’ – which applies to pension schemes with a ‘pensionable value’ of more than £1.073m – means that the excess pension income will be taxed at an effective rate of 55%.”
He added: “The Government says that the maximum rate of tax anybody should pay – at least officially – to ensure that high taxes don’t become a disincentive is 45%. Therefore, is it surprising that those facing a marginal rate of 55% on their excess pension income are looking to retire early? Indeed, the 55% marginal tax rate on excess pension values is one of the factors which has driven early retirement amongst GPs and NHS surgeons, for example.”
Robert said: “There is also evidence to show that many people who were traditionally ‘freelancers’ – i.e., people who were in many respects self-employed and often worked through their own personal service companies (or PSCs, for short) – have simply opted out of the labour market, as they do not wish to be caught by the ‘mess’, which is the Government’s IR35 regulations.”
Robert added: “The IR35 regulations result in freelancers suffering the worst of every world. They get treated to ever higher tax rates – which can – in some scenarios – be higher than those suffered by a regular employee, whilst not benefiting from any of the legal rights associated with employment including paid holidays, employer pension contributions and other legal protections.”
Robert said: “If there was ever a double whammy in the UK tax system, this is the perfect example of it.
Whilst wider economic factors – e.g. high inflation – or general boredom may result in some early retirees returning to the labour market at some stage in the future, if Rishi Sunak is serious about encouraging this process, he needs to accept that the UK tax system as it presently simply not fit for purpose and ensure that these blockers in the system – which are well known – are pro-actively addressed as a matter of urgency. Otherwise, any claims or promises in this regard are simply a lot of hot air…”