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Raiders on the storm

Last year, speaking at a series of IFA dinners held around the UK, a number of advisers were quick to slate the media. Why don’t we write about things that really matter, was the common refrain.

In particular, why had we written nothing about Gordon Brown’s continuing £5bn annual tax raid on pensions, the result of his decision to scrap dividend tax credits in 1997?

In my role as the (un)appointed representative of personal finance scribes everywhere, I spoke up stoutly on behalf of my profession. Of course, we had written about the issue, many times. I had lost count of the number of times over the years that my colleagues, had castigated the Chancellor for his decision.

Yet it was only last week, that the full import of what Brown had really done finally hit the front pages of most newspapers and the top of broadcast bulletins.

Again, just like a year ago, the question was raised – why had the media done so little to tell the public what “Oor Gordon” had been up to back in 1997?

The first point to acknowledge, and this may be very difficult for some, is that the decision Brown took made sense in the context of what was happening at the time.

Contrary to what most people believe, Brown’s various tax raids, sneaky although many of them might be, are not used to buy him extra suits, cars or even dental treatment.

The money is spent, wisely or otherwise, on areas in the public sector that have suffered woeful under-investment for many decades.

Second, there was a genuine issue in relation to dividend tax credits. Back then, many UK companies were paying far more in dividends than their European counterparts, regardless of overall profitability.

Such concerns led the then Conservative Chancellor Norman Lamont to cut the dividend tax credit from 25 per cent to 20 per cent in 1993. The man who came up with the idea was David Cameron, now Tory leader, then an adviser to the Chancellor.

In any event, 10 years ago many company pension schemes had big surpluses above their liabilities – as much as £60bn by some estimates, so companies were taking “pension holidays”.

In that context, the opportunity to raise an extra £5bn for the Exchequer, while ending an anomaly within the UK tax system that was widely acknowledged to be harmful to the long-term interests of the UK economy must have seemed like a very attractive proposition.

Like any politician with a bevy of number-crunchers at his disposal, Brown was being entirely sensible when asking civil servants to prepare a series of papers in which the potential consequences of any decision could be examined in detail.

As we know, their warnings were 100 per cent correct – at least in so far as their assessment of that particular measure is concerned. Equally, the Treasury papers also anticipated that pension fund losses might be mitigated by a continuing buoyant stockmarket.

Let us not also forget, when talking about Gordon Brown’s dividend “tax grab”, that back in 1996-97, the total corporation tax take was almost £28bn. By simultaneously cutting corporation tax from 33 per cent to 31 per cent, the Chancellor was foregoing at least £860m a year from 1997-98, rising to £1bn the following year and subsequent years.

In theory, scrapping this tax relief should have been a virtuous circle, in which everyone gained eventually, as reinvesting profits should lead to a more successful company and, in turn, better profits and higher dividend payouts in future.

What really did for the Chancellor was a combination of internal and external factors. Externally, UK and world stockmarkets collapsed, wiping about £250bn off the value of pension funds.

New accounting rules mean deficits in company pension schemes have become far more obvious, leaving employers to plug increasingly big holes and the fact that people are living longer means the same funds have to stretch much further.

In that context, scrapping tax dividends may have exacerbated the situation but was not the key cause for the poor state of the pension system. Which takes me back to my starting point – the reason why this issue has become so important is personal. It is not because Gordon Brown raided the wrong cookie jar but because he is a step away from becoming Prime Minister and the many other “stealth taxes” of recent years have come back to haunt him.

By raising the issue of his “character”, all sorts of past financial sins and omissions that were previously only commented on by specialists have now become fair game for the press as a whole.


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