People over state pension age may have to pay National Insurance on money they earn after a Government report said that their exemption “needs to be examined”.
In March 2016, the Office of Tax Simplification – yes there really is one! – published a report into what it calls ‘closer alignment of income tax and national insurance’.
It falls short of recommending that the two taxes on income are combined. But it did conclude that National Insurance Contributions are complex, poorly understood, and do not support what it calls “the UK’s flexible workforce”.
Paul Lewis' explains the complex new flat-rate state pension.
More of the over-65s remain in work
People over 65 are playing a growing part in that flexible workforce. Nearly one in nine now do paid work – a total of 1.2 million.
People over state pension age – currently 63 for women and 65 for men – do not have to pay national insurance contributions. That saves them the 12% tax on their earnings between £8060 and £43,000 a year. If they earn £300 a week the exemption halves their tax deductions, a saving of £17.40.
Find out more about the rules around working after state pension age.
Tax advantage for older workers
The report says this concession dates back to when pensioners lost their state pension if earnings exceeded a certain amount. So as a concession they were not expected to pay NICs.
That may or may not be the reason (it is much more complicated than the Report suggests) but when the ‘earnings rule’ was scrapped in 1989, the exemption from contributions was not removed. That left working pensioners with a clear tax advantage over younger people.
Although the report did not directly suggest removing the concession, it did recommend “aligning the scope of Income Tax and National Insurance Contributions on employment income.”
If that happened fully then the exemption for those over state pension age would disappear, though it would be a brave Chancellor of the Exchequer who announced it!
Paul Lewis writes for Saga Magazine. Click here to subscribe.