As Sajid Javid succeeds Philip Hammond as chancellor of the Exchequer, Gordon Andrews and Jon Greer highlight five personal finance reforms he ought to prioritise
The tax system has grown ever more complex under the stewardship of George Osborne and Phillip Hammond, leaving plenty of unfinished business for Sajid Javid, writes Jon Greer. There is a backlog of unhelpful policies that are at best obfuscated tax grabs and at worst badly thought out measures with dire unintended consequences.
The annual allowance taper, residence nil-rate band and Lifetime Isa (Lisa) have all made our tax and savings system more complex. These contrived policies were aimed to target very specific behaviours and practices but the complexity of the design means they have come with a bundle of unplanned consequences or have failed to gain traction with savers.
The government has also dragged its feet for far too long on matters such as social care funding, which it promised to address in the 2017 General Election. New prime minister Boris Johnson has this week repeated that pledge.
The new Chancellor now has a fresh slate and a crucial year ahead to fix the following problems before a possible election.
Scrap the annual allowance taper
Javid needs to scrap the annual allowance taper to alleviate the NHS pensions crisis and recruitment pressure on public services, writes Jon Greer. The taper reduces the annual allowance for employees with earnings between £150,000 and £210,000. For every £2 of earnings above the threshold, the individual loses £1 of their annual allowance.
That means someone earning £170,000 has a reduced £30,000 annual allowance, while earnings of £190,000 lead to an annual allowance of £20,000 and the allowance for those earning £210,000 falls to just £10,000. For those in public sector pensions accruing benefits in a defined benefit scheme, this means higher paid workers breaching the annual allowance are likely to face an annual allowance tax charge, payable at their marginal rate of income tax.
Data shows many NHS clinicians are now facing a financial penalty for taking on extra shifts, since the increase in their earnings also exacerbates their annual allowance tax charge liability. A Freedom of Information Request from Quilter has revealed a comparable trend in the Judiciary, where 25% of judges breached the annual allowance and the Ministry of Justice faces similar recruitment challenges filling positions. The best solution would be to scrap the tapered annual allowance altogether, given it is inherently complex and unpredictable.
Remove RNRB; raise IHT threshold
The chancellor should remove the residence nil rate band (RNRB) and raise the inheritance tax (IHT) threshold, writes Gordon Andrews. The tapered annual allowance was originally introduced to pay for the RNRB and, in principle, the concept made sense.
By providing additional relief from IHT on property, while limiting some of the generous tax relief on pensions, the combined policies were supposed to be tax-neutral. Somewhere along the line, however, the assumptions went awry and the scenario has in fact been disastrous for the public and beneficial for the Exchequer.
Introducing the RNRB and the annual allowance taper was supposed to help homeowners burdened with the threat of IHT, while maintaining pension savings incentives for all but the highest earners. In that sense it could be seen as a double-edged sword that brought an unwelcome reduction in the pension annual allowance but offered a quid pro quo for homeowners.
That is not what has transpired. Not only have IHT receipts continued to skyrocket, but the tapered annual allowance has punished hard-working doctors and other senior public services employees. The government has raked in more than double the expected income from the tapered annual allowance, while the RNRB has not had its intended purpose of reducing IHT. So it is having its cake and eating it too - and it is a cake that is towering high.
The recent Office of Tax Simplification (OTS) report on IHT simplification crunched the numbers on what scrapping the RNRB and increasing the nil-rate band would mean for the public. The chancellor should look carefully at this and find a threshold for the nil-rate band that would cost slightly more and benefit the same number of people so the public does not risk paying more tax than necessary due to the complexity of the rules.
Reform gifting allowances
As mentioned, one of Hammond's initiatives was to task the OTS to look at the archaic and convoluted IHT system, writes Gordon Andrews. At the beginning of this month, the OTS reported back with more than 100 pages of recommendations. One of the meatier sections of the report was on the topic of gifting. The recent OTS report on the IHT system points out the annual gifting allowances are significantly outdated.
There is no way to avoid inflation in day-to-day life - it eats away at our savings, it increases the cost of daily expenses and much more. And yet the government has avoided the corrosive nature of inflation as the gifting allowance has remained frozen at the same rate since the early 1980s. Bringing it in line with the modern day is a no-brainer.
It is not only fair - it will increase the flow of money through generations. Today's personal annual gifting limit of £3,000 does not go far, while the buying power of £12,000, which is what it would be had it risen in line with inflation, could make the difference when it comes to paying school fees or buying a house.
Changes to IHT could be a nice giveaway for the Conservatives if and when they have to head into a general election. Really, though, this should be a cross-party initiative as rules regarding IHT are, by their very nature, long-term and require advanced planning. A constantly shifting framework makes such planning impossible.
Provide clarity on social care reform
The government has been promising a green paper on social care for what feels like an eternity and - despite the continual reassurance - it remains like a mythical creature, writes Gordon Andrews. The chancellor will not be able to balance the books properly until we know what potential policies are on the table. Prime minister Johnson has renewed the pledge to fix the social care crisis and this will apply pressure to the Department of Health and Social Care to deliver what it has promised.
We cannot forget this is just the first stage in a long process towards shifting policy and finding a solution. There will need to be a consultation and a white paper - and that is all before we actually implement a timeframe to have a new system up and running.
Social care is a two-pronged issue. It is a problem for those for whom the prospect of needing later-life care is right around the corner and those starting to accumulate wealth. Arguably this is more the case for the former than the latter as they have minimal time to build up hundreds of thousands of pounds from their savings and assets - but the paper needs to address both camps.
In some respects, something akin to the pension system would be sensible - in other words, a flat state provision for all, topped up by self-funding, which is encouraged by the state and workplace.
Review and simplify the ISA landscape
For many years, politicians have noted the success of the ISA regime, which is viewed as a simple and easy-to-use savings product, writes Gordon Andrews. The brand has, however, become muddied with complicated products like the Lisa.
The Lisa was born as an experimental hybrid between a first-time buyer incentive scheme and a retirement savings plan. Housing minister James Brokenshire recently made a similar proposal, recommending the pensions system be reformed to allow first-time buyers to use their pot to finance a mortgage. The fact his plans were roundly scorned speaks volumes.
When Osborne first announced the Lisa, it was seen as a potential forerunner to a ‘taxed-exempt-exempt' approach to retirement savings with a universal flat-rate savings incentive of 25%. Thankfully those proposals, floated before the last election, now seem to have been consigned to the pensions policy scrapheap.
The result, however, is a tax wrapper with exit penalties acting to deter withdrawals, much like an unauthorised payment from a pension, while being branded as an Isa. It is no surprise that consumers have already been fined more than £1m for accessing their money early.
Simplifying the plethora of ISAs now on offer would ensure people are not put off saving by trying to navigate a complex field of products. A first-time buyer bonus should be applied at the point of purchase, like the Help to Buy Isa, if the government were still to offer support for aspiring homeowners.
Gordon Andrews is tax and financial planning expert and Jon Greer head of retirement policy at Quilter
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