TAX NEWS - June 2010

UK Tax: Liberals want to abolish higher rate tax relief

Rather irritatingly from a journalist's point of view the Budget has been set for 3.30pm. So it will back to the bad old days of scrabbling desperately for the all the facts in time for the first deadline – and then hoping desperately that no-one else has spotted a story we have missed.

With Gordon Brown's Budgets the devil was inevitably in the detail. I hope we can expect better from Mr Osborne.

David Cameron has obviously been preparing the ground for a return to austerity Britain. Though our parents and grandparents would point out that austerity 2010 style will be nothing like that they suffered in the 1940s and 1950s.

We have been given broad indications of what to expect already including capital gains tax reform with some form of entrepreneurs relief, a rise in the income tax personal allowance and public spending cuts. So what of the real money-raising measures?

An increase in the main rate of VAT to 20 per cent has been widely speculated but not confirmed. This could well be delayed until next year. Why? Well a pre-announcement could encourage more spending on big items now, thus giving a one-off boost to tax receipts this year.

Pensions are another area of interest. The Liberals wanted to abolish higher rate tax relief, the Tories do not as far as we know. But it is worth a lot of money – estimates suggest between £3bn and £6bn a year.

Under normal circumstances this would be a sacred cow for the Tories. But just as it took a Labour government to introduce tuition fees, it may be a Tory one which attacks higher rate tax relief.

Another idea – from Hargreaves Lansdown – is to cut the annual contribution allowance to about £50,000, but scrap all Labour's complex calculations for reducing higher rate relief. This would raise about the same amount of money and cut out a lot of complexity. And the pre-retirement year exemption on this contribution limit could be retained to protect small business people who sell up and make a large one-off pension contribution at retirement.

I expect plenty of consultations and debates but few actual immediate tax raising measures outside of those we know about.

We are, as the Chinese curse goes, living in interesting times. Let us just hope that they do not become too interesting.


Society's gains

Amidst all the furore over CGT, ordinary savers have been overlooked yet again. Concerns over raising the CGT rate from 18 per cent to as much as 40 per cent are understandable. But I have become a bit irritated over accountants (who are among the greatest beneficiaries of the 18 per cent rate) talking about people being taxed merely on inflationary gains.

First there is a rather tasty £10,100 annual exemption on capital profits. But more importantly millions of savers are taxed on their income at their highest marginal rate even though their interest does not come close to keeping pace with inflation.

I believe we need a thorough review of how all savings and investment income and gains are taxed. Why, after all, should someone benefit from paying a lower tax rate simply because of how they invest their money – unless the aim is economic manipulation. Currently, depending on how someone invests they may be taxed at zero, 10, 18, 20, 30, 32.5, 40, 42.5 or 50 per cent. They may pay that tax immediately, after a year or so, or as much as 20 years later. And this is on money we invest from a salary that has already been taxed.

I can see no sensible argument why a pensioner earning a few pounds income on their savings should lose 20 or 30 per cent to tax while millionaire investors can pay 18 per cent. Attempts to help smaller savers through cash Isas have largely failed because banks steal much of the tax relief by paying lower rates on Isas than on comparable taxed accounts.

The reforms to CGT do need further thought to avoid punishing those running business or who have their pension tied up in property. But so does every other aspect of how our savings are taxed.


Friends like these

The death of the child trust funds will make life tough for friendly societies who used them as a reliable source of income. But they may not be mourned by parents who scrimped and saved for their children but received a poor reward.

One correspondent summed up their experience of friendly societies to me thus: "My wife invested £16 a month for 15 years. Total in £2880. Total out July 2010: £3023.80. Profit £143.80. Disgraceful."

With their high charges, poor performance and support from naïve Labour politicians, these societies are about as friendly as a crocodile – and as likely to snap off your hand and any spare cash you have grasped in it. I do not mourn the death of the child trust fund and have no sympathy for the societies that live off them.