Potential Reversal of Winter Fuel Allowancemay Cause Unfair and Intricate Taxation System
Hey there! Here's an updated take on the situation regarding winter fuel payments for pensioners:
Winter fuel payment savings for nine million UK pensioners might be significantly reduced based on the "new complexity introduced in the tax system." This is the warning issued by economic think tank, Resolution Foundation.
Initially, the government declared that the £1.25bn budgeted for winter fuel payments presents a cost reduction of up to £450m compared to the previous form of the benefit, although confirmation from the Office for Budget Responsibility (OBR) is still pending.
However, economists at Resolution Foundation express concerns that the payment for pensioners with incomes below £35,000 could make the UK's tax system more complex. The government plans to automate the payment collection through PAYE, HMRC's tax system, or self-assessment for those not eligible for PAYE.
Additionally, pensioners can opt out of the payment worth up to £300 each winter, saving the government further cash. Alex Clegg, an economist at Resolution Foundation, indicates that the government's U-turn on providing winter fuel payment for pensioners might not yield as significant savings as initially projected.
Clegg further points out that the "new means-test" will create complexity in the tax system, including a "cliff-edge" for those with around £35,000 of income. He anticipates reduced savings due to increased pension credit take-up as a result of the policy change and the cost of administering the new means-test.
Such concerns echo an earlier warning from the Institute for Fiscal Studies (IFS). The UK has one of the most complex tax systems among developed economies, with administration and compliance costing small businesses around £25bn this year, as reported lately in the industry.
Robert Salter of advisory firm Blick Rothenberg contends that this policy change will create more problems than it solves for both pensioners and the Revenue. He highlights the potential for unfairness in the tax system, with complexities similar to the High-Income Child Benefit Charge (HICBC).
HMRC is set to undergo vast reform under Labour, with technology and AI tools expected to be integrated into tax systems to improve efficiency.
The new commitment will add to the costs Chancellor Reeves will have to cover through spending cuts in other departments or extra borrowing or further tax hikes. The rising tax hike fears could result in extending the freeze on income tax thresholds, which is considered a "stealth tax" that might force more pensioners to pay into government coffers. Alternatively, a one percent increase in the 20% VAT rate could raise £10bn, while moderate tax hikes such as a single percentage point hike in the higher rate of income tax might yield an additional £2bn.
In conclusion, the introduction of means-testing for winter fuel payments has the potential to increase the complexity of the tax system, adding to the administrative burden for both pensioners and the government.
- The Resolution Foundation warns that the new means-test for winter fuel payments could make the UK's tax system more complex, especially for pensioners with incomes below £35,000.
- The UK's tax system is already one of the most complex among developed economies, with administration and compliance costing small businesses around £25bn this year.
- Alex Clegg, an economist at Resolution Foundation, anticipates reduced savings due to increased pension credit take-up as a result of the policy change and the cost of administering the new means-test.
- Robert Salter of advisory firm Blick Rothenberg contends that this policy change will create more problems than it solves for both pensioners and the Revenue, highlighting the potential for unfairness in the tax system.
- With the new commitment to reform HMRC, technology and AI tools are expected to be integrated into tax systems to improve efficiency, which could potentially increase in the face of rising tax hike fears due to the means-testing for winter fuel payments.
