Hours and hours of financial advisers’ time – not to mention that of lawyers, accountants and pension professionals – is spent navigating Britain’s arcane tax system.
It needs a complete overhaul. A truly simple system could raise more revenue, encourage growth, compliance and not least save time for overburdened taxpayers.
Advisers might protest, as did one 20th century judge, 'reform, reform – aren’t things bad enough already?'.
There is an element of truth in that – often mere tinkering at the edges with every change in political hue just brings in new legislation and complexities, sometimes at odds with the previous rules.
From pensions to council tax, our archaic tax system is not worthy of a leading economy.Yet, according to PwC, the UK tax code has grown, from 5,000 pages in 1995 to 10,000 in 2010 and more than 20,000 pages now. That would probably take at least a week simply to read it out aloud without any comprehension.
After a probable General Election in 2024, the next government will face tight budgets, limited cash and a low bandwidth for reform. That need not mean low ambition. A proper fiscal framework for the 21st century could be a treasured legacy for a bright new chancellor.
Stealth taxing
Stealth taxation, practised by all the major parties, is to blame for much of the current verbosity and Byzantine mess. Such artfulness goes back centuries.
Indeed, Jean-Baptiste Colbert, King Louis XIV’s finance minister, was a great exponent in the 17th century. He advised plucking “the goose to obtain the largest possible number of feathers with the smallest possible amount of hissing”.
These tactics deceive no one. From pensions to council tax, our archaic tax system is not worthy of a leading economy. What other country bases its local property taxes on a 1991 residential value – more than 30 years ago.
Millions more just withdraw cash from their pensions to their bank accounts, fearful that the legislation will change and they will be taxed even more.Almost as bad as the notorious windows tax – introduced in the UK in 1696 and not finally repealed until 1850, the year of the Great Exhibition, which deprived people of light and ventilation – is the iniquitous pensions tax.
This convoluted tax does not incentivise the poor to save and demotivates prudent professionals such as doctors to even work; forced out at their prime with penal rates of almost confiscatory level on their hard-earned savings.
People have no confidence, even in little things like the continuation of the much-loved pensions tax-free lump sum. Every Budget there is a panic that this might be axed.
No wonder Barnett Waddingham research reveals that almost half of consumers are using a savings account to save for retirement (45 per cent), and 25 per cent are using a cash Isa.
And millions more just withdraw cash from their pensions to their bank accounts, fearful that the legislation will change and they will be taxed even more or lose existing tax-free perks.
Others are surprisingly ignorant; according to The People’s Pension one-third of people are unaware that the government even contributes tax relief to their pension.
Why would they work when the penalties are so heavy for anyone with even a middling defined benefit pension?Pensions tax is not fair between the generations, retirees not long ago had lifetime allowances approaching £2mn. Today’s retirees usually have scarcely £1mn – is it equitable that retirees have different tax rules, depending indirectly but largely on their age?
It is the same with the annual allowance. Millions of people are economically inactive when the UK is desperate for labour. Why would they work when the penalties are so heavy for anyone with even a middling defined benefit pension?
Despite the present taxation quagmire, one little noticed announcement in the ill-fated Kwasi Kwarteng Budget (but still to be enacted in the 2023 finance bill) is the closure of the Office of Tax Simplification.
This is a retrograde step but not surprising as most of its eminently sensible suggestions were ignored or watered down.
A government spokesperson told FTAdviser: “Tax simplification is a priority for this government, which is why instead of a separate arms-length body to oversee it, we will embed it into our institutions so it is at the core of all tax policymaking.”
Yet it seems a strange way to show their priorities by abolishing an office much valued by the great and the good of the tax profession.
According to its most recent annual report, the OTS employed the equivalent of 7.5 full time people with a budget of £1,057,000. A drop in the ocean in terms of government spending.
Is it too much to ask to simplify and codify our tax system?Indeed, the government seems to pay mere lip service to simplification with a slew of new taxes:
- The annual tax on enveloped dwellings.
- The soft drinks industry levy.
- The plastic packaging tax.
- The residential property developer tax.
- The diverted profits tax.
- The digital services tax.
But tread carefully: even when simplification is attempted, it can backfire. From, potentially, April 6 2026, self-employed businesses and landlords with annual business or property income above £10,000 will need to follow the rules for Making Tax Digital for Income Tax.
PwC warns that: “It doesn’t always work well for those with more than one job, pensioners with a number of pensions or those with part-time earnings, even when the overall level of income is relatively modest.”
Just over 100 years ago, the revolutionary Finance Act 1921 set the framework for pensions tax relief. This remained broadly intact for most of the 20th century.
Is it too much to ask to simplify and codify our tax system, if not for all 20,000 pages of rules, at least for pensions, to make them fit for the rest of the 21st century?
Stephanie Hawthorne is a freelance journalist
