Value lies in helping clients recognise threats and opportunities, then how to avoid or exploit them
If you believe the future for face-to-face advice is centred on more complex challenges requiring expertise not generally available (or “Googleable”), then it will follow that the market for that advice will predominantly comprise higher and additional rate taxpayers.
The more painful their tax burden, the more motivated they will become to do something to reduce that pain. Of course, this has always been the case. People tend to be motivated by either fear or greed as a precursor to taking action.
With this in mind, a large part of the role of the financial planner is to create justifiable anxiety. That might sound a little manipulative but, trust me, it is not. It is about helping individuals to appreciate a particular challenge or opportunity and then showing them how to avoid or exploit it.
Identification of these threats and opportunities is a big contributor to the advice alpha: that is, the net benefit of the advice given to the client, having taken account of the cost of it.
As well as the benefit to finances driven by the mere engagement with a planner, there is also the alpha delivered in making the right choices. That is particularly pertinent in relation to tax planning.
Despite the best efforts of the Office of Tax Simplification, the UK tax system is still labyrinthine, beset by traps for the unwary. Of course, it is most likely to be higher and additional rate taxpayers that will have the most challenges in this area – regardless of whether they know about them or not.
Around 4.7 million people will fall into the top two tax bands in the current financial year – all of those could be actual or potential clients
It has recently been reported that additional rate taxpayers paid almost 9 per cent more in income tax last year than the year before. This is thought to be as a result of the increasing impact of the lifetime and annual allowances – and that impact is only expected to continue.
As well as the limitations to pensions imposed by the rising lifetime and annual allowances, inflation has also pushed up earnings in the past decade, dragging more workers into higher tax brackets. Indeed, inflation has increased wages by 26 per cent since 2008, but the threshold at which earners start paying tax at 40 per cent has risen just 13.5 per cent over the same period – classic stealth tax.
There are many examples in the tax code where doing nothing to increase thresholds (or limiting these increases) gradually, and quite substantially over time, increases the overall tax yield without the political damage caused by an increase in tax rates themselves.
But while the main impact of these changes appear to have fallen on additional rate taxpayers, higher rate taxpayers are by no means exempt. According to HM Revenue & Customs, around 4.7 million people will fall into the top two tax bands in the current financial year. All of those could be actual or potential clients.
As I have said, the greater the financial pain, the more open an individual will be to taking action to avoid it. While we have seen, and will continue to see, relentless HMRC action to thwart aggressive tax avoidance, there are many legitimate and acceptable ways to reduce and avoid taxation. And just because a strategy is acceptable, it does not mean that it is simple. Advice is necessary to achieve all-important tax alpha.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn