Tax changes needed to encourage 50-plus cohort back to work

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The sharp drop in early retirees can only be addressed if the government takes radical action to reform the current tax on pensions and IR35 trap

The government’s 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, warns tax and advisory firm Blick Rothenberg.

In the 2022 Autumn Statement the Chancellor said that the Department for Work and Pensions would ‘thoroughly review workforce participation’ and report in early 2023.

Robert Salter, a tax services director at Blick Rothenberg said: ‘Whilst 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.

‘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.’

The UK pension rules pro-actively discourage those with a strong pension fund (or those who benefit from a final salary scheme) from continuing to work. The 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%.

Salter 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 among GPs and NHS surgeons, for example.’

Another negative factor is the impact of the IR35 off payroll working regulations which have hit the self employed and people working through personal services companies (PSCs).

Salter said: ‘There is also evidence to show that many people who were traditionally freelancers, ie, people who were in many respects self-employed and often worked through their own personal service companies, 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.

‘The IR35 regulations result in freelancers suffering the worst of every world. They get treated to ever higher tax rates, which can 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.’

‘If there was ever a double whammy in the UK tax system, this is the perfect example of it.’

The government needs to address the tax system to encourage older workers back to the workplace. Before Christmas it floated plans to provide these individuals with a personal MOT to assess their financial position and opportunities for various types of work.

Lord Headley, chair of the Economic Affairs Committee, said: ‘The rise in economic inactivity makes it harder to control inflation; damages growth, and puts pressure on already stretched public finances. That’s why it’s critical the government does more to understand the causes of increased inactivity, and whether this trend is likely to persist.’

While a return to work interview may work for some people, a review of tax liabilities would be more effective.

‘Whilst wider economic factors, eg, 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 is presently is simply not fit for purpose.

‘He needs to 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.’

For answers to more questions on employing older workers, visit BrAInbox today where you can find answers to questions like What is un-retirement?

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