Isle of Man Budget 2023: A Pensions PerspectiveMarch 10, 2023
Dr Alex Allinson’s first budget: a pensions perspective
For the second year running we have a treasury minister delivering his first budget. Dr Allinson’s budget, from a pensions perspective, followed a similar vein to Mr Ashford, MBE last year in that there was little from the perspective of pensions, other than an increase in the Manx state pension. This year will see a rise of 10.1% which reflects the increase in inflation over the past year.
The major taxation change brought in this year is the tapering reduction in personal allowance for high earners. To truly understand the impact of this, we have looked at the numbers.
From next year, anyone individually tax assessed, earning over £100,000 will have their personal allowance reduced by £1 for every £2 over this amount. This has the effect of reducing the individual personal allowance to zero once income reaches £129,000.
The effect of this is that while the £29,000 is taxed at 20% (£5,800) the loss of personal allowance means that 20% tax is also paid on an additional £14,500 (£2,900).
Simply put, a high earner on £100,000 receiving a bonus of £29,000 would see this reduced by £8,700, giving a net bonus of £20,300. An effective tax rate of 30%.
Of importance to all taxpayers, and slightly less headline grabbing, is the news that personal allowances and tax thresholds are frozen at 2022/23 rates. Indeed, the individual personal allowance has failed to retain parity with inflation for a number of years. The lack of indexing effectively increases tax for any taxpayer receiving an increase in salary.
In addition, the UK Government Actuary has recently issued a report on the operation of the Island’s Social Security. This suggests that, in the absence of reform or additional funding, the Isle of Man National Insurance Fund will be exhausted by 2047-48.
Taken together, these points highlight the importance of everybody taking control of their own financial destiny, including maximising the tax efficiencies afforded by good pension planning. Fortunately, the Island boasts an excellent pensions tax regime (which remains unaltered in this budget), with a higher annual contribution limit (£50,000 compared to £40,000) and more generous tax-free lump sum benefits (40% compared to 25%) than the UK.
One area where we thought there may be a mention in this budget is that of compulsory workplace pension schemes. With an ageing population, and the proportion of those working (and paying in) compared to those in retirement (drawing a state pension) reducing, many countries have introduced these.
While the Isle of Man is becoming a bit of an outlier in this respect, perhaps the employment market is removing the requirement for government intervention in this area. Unemployment, particularly long-term unemployment, is low on the Island and as many companies will testify hiring the right staff is difficult, with a company sponsored pension increasingly now being seen as a minimum part of an employee benefit package. Indeed, for high earners affected by the reduction in personal allowance, a pension provision should definitely be part of the remuneration package.
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