Petition Make states old age pensions exempt from tax

Ministers responded

This response was given on 3 July 2024

Jersey has a world-leading tax threshold of £20,000 for single individuals. Anyone with income below that threshold does not pay a penny in income tax.

The allowance is even higher for most married couples and civil partners at £32,000.

The generous tax allowances ensure that, even though the old age pension is taxable, pensioners on low incomes who receive only the old age pension do not pay any income tax. In fact, approximately 50% of pensioners do not pay any income tax. Making the States old age pension exempt from tax would not benefit those pensioners with the lowest incomes.

Introduction
The petition suggests that a person who pays social security contributions in Jersey, pays these contributions into a personal pot that funds their old age pension – in the same way that private pension provision works. This is not the case for two main reasons:
1. Paying social security contributions gives Islanders access to the old age pension and a range of other benefits.
2. Those old age pensions and benefits are funded by multiple sources, not just Islanders’ own individual contributions.

Differences between the old age pension and a private pension
Social security contributions made into the Social Security Fund are very different from contributions into private pension schemes. Accordingly, they are treated differently for tax purposes.

Governments across the world incentivise their working age populations to make additional provision for their old age, to supplement the old age pension, by offering them income tax relief for paying into a private pension. Payments into a private pension are commonly relieved from tax when they are paid in (usually with some limits or caps) and taxed when the pension income is paid out on retirement.

Social security contributions paid by working people are not the same as private pension contributions. They are a sum of money paid into the Social Security Fund to provide a range of benefits for Islanders, including the old age pension, but also other benefits. These benefits include short- and long-term incapacity allowances, carer’s allowance, parental grants, and many other benefits.

Social security contributions can be thought of as a form of insurance, for financial support that Islanders might need at some point in their lives.

How old age pensions and benefits are funded
Although these contributions pay for old age pensions and a wide basket of benefits, it is also important to note that employee social security contributions are not the only payments into the Social Security Fund.

Old age pensions and benefits are funded from multiple sources: by Islanders’ own social security contributions, by contributions from employers, and from direct tax support through the States Grant.

The States Grant is an annual payment of general tax revenues into the Social Security Fund. It is sometimes called ‘supplementation’ because it subsidises the contributions for Islanders who earn less than the standard earnings limit (£65,400 in 2024) so that they can maintain their contributions record – for example during periods of illness. Three-quarters of Islanders receive this support from Government to ‘top up’ their contributions records – and nearly all Islanders will benefit from the States Grant at some point in their working lives. This support allows Islanders to build up their entitlement to the old age pension and other benefits.

Although there is no direct income tax deduction for employee social security contributions, Government support is being provided in an alternative way through the States Grant – funded by general taxation. This allows a higher and more sustainable level of benefits to be paid out.

Individuals receive tax support, not via tax deductions, but by the support of the States Grant and supplementation. Without the tax support from the States Grant, all payments from the Social Security Fund, including pensions, would be either lower, or not sustainable.

Income tax and the old age pension
The petition correctly states that pension and annuity income is taxable when a person becomes entitled to it. However, I do not agree that this amounts to double taxation.

It is notable that Jersey’s personal income tax thresholds mean that around 50% of pensioners do not pay income tax on any of their income. Those who do pay tax are only taxed on the excess over the tax threshold (£20,000 for single individuals and £32,050 for married couples and civil partners in 2024). Any Jersey pensioner whose only income is the old age pension will not pay any income tax.

The UK position
The tax treatment of social security contributions and the old age pension is not unique to Jersey. The position in Jersey broadly mirrors that in the UK, the other Crown Dependencies and in many other jurisdictions.

The petition states that the UK “is about to make pension income exempt from taxation”. This is incorrect.

The Conservative Party has pledged to increase the tax-free personal allowance for pensioners each year in-line with the increase to the UK state pension, so that pensioners who receive only the UK state pension remain outside the tax net. This is already the position in Jersey. UK pensioners with other income, who therefore exceed the UK tax-free thresholds, will be subject to taxation on their total surplus income above the threshold – in the same way as they are in Jersey.

The UK state pension remains part of a person’s total taxable income – just like any other source of income for that person e.g. bank interest, private pension income, etc.

An equivalent policy to the Conservatives’ proposal is not necessary in Jersey because the tax thresholds far exceed the old age pension (the Jersey old age pension is higher than the UK state pension).

Exempting the old age pension would not benefit lower earners
Exempting the old age pension from income tax would only benefit pensioners who pay income tax. It would do nothing for the half of pensioners (the lower earners) who do not already pay tax.

The resulting loss in taxation would result in other groups, such as young families, having to pay more in tax or social security contributions, to maintain the Social Security Fund and allow the current pension and benefits to be maintained.