Tax complexity, and the value of advice
The UK’s tax system could be simple if its sole purpose was to raise revenue. However, it also needs to be fair, efficient, and enforceable, while successive governments have increasingly used the tax system to drive behaviour and influence social policy.
For example, pensions tax relief is designed to encourage us to be responsible for our own incomes in retirement, but it costs the Treasury in excess of £40bn pa. To limit this, since 2006 its availability has been modified through the annual and lifetime allowances. Through frozen allowances over the next few years, more will be caught, yet the impact can often be minimized through early consideration.
The implementation of the Health and Social Care Levy, temporarily as an addition to NI, means that salary sacrifice this current tax year will be more valuable than when it becomes a separate tax. And should basic rate tax reduce to 19% in just a few years time, as recently advertised by Rishi Sunak, pensions tax relief will become slightly less attractive for most. In other words, for many who are employed, 2022/2023 could be the sweet spot for pension contributions.
And the obvious isn’t always the best. For example, couples and civil partners relying on the transferable nil rate band since its inception in 2010 are likely to leave significantly less to loved ones than those planning ‘old school’ with the nil rate band discretionary trusts. For as long as asset price inflation remains above the growth in the nil rate band, this will continue to be the case.
In 2015, the Office of Tax Simplification identified that the impact of complexity was significantly related to the staggering quantum of reliefs, exemptions and allowances in one of the longest tax codes in the world. The Residence Nil Rate Band, that post dates the report, is of the most complex of the 90+ reliefs and exemptions for IHT, and dramatically compounds this. And pensions freedoms, dating from the same year, deliver choices in decumulation, which may only prove valuable with advice.
Sadly, complexity impacts the poorest in society more than those who can afford or are willing to take advice, whilst in some areas of wealth management the paucity of specialist advisers exacerbate the problem.
As Sir Geoffrey Howe said, ‘simplification was like painting Brighton pier while someone else was extending it to France. In financial planning terms, quite possibly there has never been a more important time to understand one’s options.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
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