With renewed calls for a flat rate tax relief in the wake of the pandemic and ahead of the so-called "mini-budget" on 8 July, Neil MacGillivray probes the government’s proposals and the mess that could ensue for DB schemes…
We are regularly reminded of the increasing cost of the financial assistance being given by the Government and the devastating impact Covid-19 is having on the UK economy and employment. The fall in GDP during March and April alone is estimated to have wiped out 18 years of growth and could lead to an estimated 2.5 million jobs being lost by late summer.
In a new report by former Chancellor Sajid Javid and the Centre of Policy Studies, After the Virus - A plan for restoring growth, more than 60 wide-ranging recommendations to re-build the economy are outlined, and in relation to tax, there could be some good news.
Significant tax rises are portrayed as an impasse to recovery. The paper therefore recommends there be no increase in the rates of income tax or Employee's National Insurance.
Indeed, in the hope of stimulating the economy and protecting jobs, it recommends a temporary reduction in VAT and Employer's National Insurance.
It also advocates the Government take the opportunity to review the UK tax system, focusing on delivering moderate increases in revenue over the medium-term. The aim is to shift the burden of taxation away from income and investment in favour of fairer more progressive taxation of property and perhaps surprisingly, tightening reliefs for the wealthy.
Are there any tax raises recommended?
Somewhat surprisingly only two are proposed, council tax and the old chestnut of tax relief on pension contributions.
Homeowners in London and the South-East have seen values soar relative to the rest of the country in recent decades, and yet for council tax purposes, values are still based on those of 30 years ago. This is to the detriment of those elsewhere, as evidenced by the fact that the average council tax bill in London is roughly the same as in the West Midlands, despite Londoners having a higher average income and far greater housing wealth.
The proposal is for a full council tax revaluation over this parliament, with subsequent revaluations every three years, plus a reform of bands and rates to align council tax bills with actual property values.
The thorny issue of limiting tax relief on pension contributions is always seen as an easy option for boosting Treasury coffers. Recent figures show that nearly 60% of relief goes to the richest income decile, and only 8% to the poorest half of the population.
Switching to a flat rate of tax relief or fixed rate of ‘bonus' on contributions up to a generous annual allowance could significantly increase the incentive to save for low earners and the self-employed and, conversely, offer significant savings for the Exchequer. However, no recommendations are given on the applicable rates, or the definition of "generous".
But these proposals over-simplify the complexity of relief. They ignore how employer contributions would be treated for tax against the individual, and secondly, how relief would work for defined benefit (DB) arrangements. If the flat rate is set at 25%, but the employee is a higher rate taxpayer, then an employer contribution of £100 would, one should imagine, mean £15 of tax being assessed on the individual.
DB schemes increase the complexity exponentially. Personal tax relief is immediate at the individual's marginal rate, and so in the "brave new world" something would have to be done to mitigate the differential between the flat rate and ‘excess' relief.
Also, there is no real correlation between the employee's and employer's contributions (never mind the previous point of employer contributions being assessed for tax against the individual) and the benefits accrued under the scheme. Perhaps the pension input amount would be the answer in such situations.
It's easy to envisage how this proposal would work for personal contributions to money purchase arrangements. However, introduce the complexity outlined above for employer contributions and DB schemes and it becomes very messy very quickly. In my opinion, the latter is likely to be a major stumbling block in progressing the pension proposals.
Neil MacGillivray is head of technical support at James Hay
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