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Alistair Cunningham: Time to end tax meddling

As a result of incessant tinkering by previous chancellors, our tax system is more complex than ever before. Successive changes have added more reliefs, created tax traps for the unwary and, in many cases, introduced perverse incentives not to earn.

The High Income Child Benefit Charge is one of the earlier examples of such poor legislation. If we park the contentious name, it sees those earning £50,000 or more unable to reclaim some or all of their child benefit (or else repay it).

The initial communication about it was appalling and, last year, HM Revenue and Customs agreed to suppress penalty charges and give terms to pay for a large number of those who had been erroneously claiming the benefit, accepting issues in the system.

The HICBC is flawed in other ways. It requires the higher earner in a couple to repay the charge, though clearly some will not have a full awareness of each other’s situation.

What is more, from 2019/20, due to the increase in the basic rate band to £50,000, it creates the most penal of cliff edges, where an individual can move from paying 20 per cent tax up to that limit but, in the £50,000 to £60,000 band on a tapered basis, would pay 59.5 per cent with two children and 73.5 per cent with four.

The obsession with tapering is a root cause of such poor legislation. That the personal allowance is lost on a tapered basis from £100,000 to £125,000 creates a 60 per cent tax band and a huge disincentive for individuals to earn at this level.

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Faced with a pay rise or bonus, who wants to see three quarters of their income (including National Insurance) paid to the government?

Of course, many will forgo their income for a pension contribution, which in most cases means no additional revenue is gained.

Those earning at this level obviously need to be aware of the pensions tapered annual allowance too, and it is this abomination I struggle with most often. There are some perverse traps due to the way the rules were introduced and, I suspect, like the HICBC, many are unaware how it impacts them.

I read recently of an NHS consultant who, due to taking clinics to reduce waiting times, had inadvertently slipped just above £110,000 of total income.

This coincided with a pay rise and, because of his relatively short service, a total pension input of £100,000. The resulting reduction in his annual allowance saw a tax liability in excess of £13,500 – for one clinic. While this is an exceptionally unfortunate set of circumstances, it cannot be right.

In order to keep the costs down when introducing the residence nil rate band, there are exclusions, most notably for those without children or using trusts to plan, and we see tapering again for those with estates above £2m.

This is an example of tax legislation brought in for political reasons, which has ended up adding complexity unnecessarily.

The problem with simplification is that, in trying to keep changes cost-neutral, some will be better off and some worse off. Take the often-discussed proposal to harmonise NI and income tax. In this case, if rates were merged and made cost-neutral, it would negatively impact those with pensions, savings and investments, while benefiting those with earned income.

A simpler, fairer system could raise more taxes and, importantly, the correct amount of tax, without the cost and complication of the current situation.

Alistair Cunningham is director of Wingate Financial Planning

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  1. Jonathan Willis 7th March 2019 at 11:57 am

    I was reading/listening somewhere recently where tax was higher for people in Germany but they got much better public services and improved retirement/sick benefits. Perhaps an option with the growing retirement/long term care bomb building up!

    Sadly due to the lack of structure and planning over the last two years for Brexit, companies understandably are losing confidence in the UK and many are investing elsewhere or moving operations. If this had been managed correctly from day one – open dialogue and robust negotiation – the UK would be in a better position right now. That aside, the ageing population and reduced birth rates put more pressure on the tax system.

    In short, what I’m saying is that all these grand political tax adjustments and ideas by government to bag a few votes have to be cost neutral or cost saving or they won’t be entertained as there’s no money! HMRC go for the low hanging fruit – modest estate sizes and higher rate/additional rate tax payers.

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