Since the Budget, I have read with interest the speculation over the withdrawal of the current top rate of tax of 50 per cent. The language used often describes the rate as “only temporary” but, to date, no firm date for removal has been made and if I were the Chancellor, I would not be in a hurry either to announce one either.
The fragile economic position and continued debt repayment requirements mean Government revenue streams need to be maintained for as long as possible.
A quick glance at some data issued by the National Office of Statistics demonstrates the success of 50 per cent tax initiative. Align this to the significant reduction in the ability for clients to make pension contributions and you see an increase in tax taken and less relief granted.
According to figures from the Office of National Statistics, there are expected to be around 300,000 additionalrate taxpayers and 3.7 million higher-rate taxpayers generating around £100bn in income tax compared with 25 million basic-rate taxpayers generating £62bn in income tax this year.
If we break the numbers down further, the typical additional-rate taxpayer is contributing on average £150,000 in income tax. This equates to an average taxable income of £300,000, meaning the additional 10 per cent of tax is generating an extra £4.5bn in tax.
If we compare this with the significantly bigger pool of basic-rate taxpayers then the average income tax take is reduced to below £3,000.
This may help explain why the Government is so nervous around disguised remuneration and other planning strategies which remove income from the system for top-earners. The impact of advice on this sector of taxpayers can have significant impact on their revenues.
This segment of the population has been well served by the adviser community and will continue to be so after the RDR but the opportunities to be creative are constantly challenged by anti-avoidance legislation and reductions in thresholds.
Returning to the statistics, replacing nearly £5bn in revenue would be no easy feat given other “commitments” by the Government such as the introduction of a personal allowance of £10,000.
There are around 60 million people in the UK, of which half do not pay any sort of income tax, so raising the zero threshold at one end and reducing the amount taken at the other looks like a significant challenge.
A significant proportion of the 30 million people paying no income tax must therefore be surviving on incomes below the proposed limit of £10,000 which is aligned to research available from www.minimum incomestandard.org. The reliance on state support for many to receive benefits to be above the poverty line again adds further pressure on the Government pursestrings.
It is this backdrop which further underlines the need for your clients to continue to receive advice on the impacts of immediate tax take and what the future might look like.
The impact of fiscal drag, meaning more clients fall into additional tax brackets or start to pay tax where previously they would not, can be demonstrated by looking at inheritance tax and capital gains tax rates. Revenues may have fallen but static thresholds such as the nil-rate band and lifetime allowance, will, over time, pull more people into the tax regime, so some tax is paid by more people rather than more tax by fewer people.
Planning early to create strategies using multiple investment wrappers which can provide flexibility in both the accumulation stage and decumulation stage will underline the move to a more holistic approach to advice and continue the move further away from an isolated product sale.
Phil Carroll is head of financial planning at Skandia