I have just had a rare moment of clarity. It came to me in a flash of light that lots of our current woes stem from a problem with language. And for once, I don’t mean jargon, which is actually jolly handy, as any medic, lawyer or air traffic controller will tell you. I am talking about the language we use lower down the food chain.
Take “bonds”, for example. We have too many bonds. We have building society savings bonds, national savings bonds, investment bonds (both onshore and, scarily for some, offshore) and corporate bonds inside funds. All very confusing to most normal people.
Another example is “commission”. Most of us are old enough to remember that horrible and disingenuous advertising campaign by Equitable Life which falsely claimed there was no commission paid to middlemen (Henry). That old chestnut again. The incorrect use of this word made all the difference, just like it still does today.
And for those of you who deal with corporate pension clients, are you not utterly bewildered by the choice of terminology someone saw fit to lend certain parts of this activity?
With the increasing use of salary sacrifice for pension payments, why on earth did someone start using the phrase “net pay”? It confuses absolutely everyone. How can a payment mechanism that comes from someone’s gross pay ever have the word “net” in the phrase?
I found myself explaining it to a bewildered client recently: “So Mrs Finance Boss, you have chosen salary sacrifice, which we’ll call salary exchange. So far, so good. We will take the employee payments from their gross pay because we all know that immediately saves lots of tax and National Insurance because we take it from source. But everyone involved calls it a net pay arrangement. Why? I have no idea. In theory, it’s a much better system than the other method that everyone calls tax relief at source, which we take from their net pay, of course.”
My guess is that, at some point, someone started confusing their terminologies and was too embarrassed to own up once they discovered it was the wrong way round, while no one was brave enough to admit they’d done the same thing until it was too late.
If you don’t believe me, have a look at this valiant attempt at explaining things by The People’s Pension, taken directly from its website: “Tax relief can be applied in two very different ways (and it’s important to get it right):
- Deducting employee contributions after tax? We call this the net tax basis. You may see HM Revenue & Customs referring to this as the relief-at-source method. When you sign up to The People’s Pension, we’ll automatically set you up on the net tax basis;
- Deducting employee contributions before tax? We call this the gross tax basis. You may see HMRC referring to this as the net pay arrangement method.”
I love The People’s Pension and how it has widened access, but can anyone say this isn’t a wider issue we need to address more urgently, especially on behalf of those poor souls who actually get no tax relief at all and who have no realistic way of discovering (let alone understanding) this sad anomaly because of the dire language we all seem happy to use?
Tom Kean is director of Thameside Financial Planning