Gerry Brown examines why potential tax changes mean financial planners and paraplanners need to start preparing to help clients, and looks at some of the things that the Chancellor might do in the upcoming budget.
On 4 January 2023, in a speech setting out his government’s priorities, Prime Minister Rishi Sunak said: “As soon as we can, the Government will reduce the burden of taxation on working people”.
Any mention by the government of changes to tax requires financial planners and paraplanners to get ‘ahead of the game’ and prepare for potential client questions on the implications of government tax strategy.
However, rather than simply say that the Government will reduce the burden of taxation, the Prime Minister added that the burden would be reduced on “working people”. That won’t be by chance. The Prime Minister’s speeches are carefully crafted and are often a result of lengthy discussions with his advisers.
So, what inferences can advisers and paraplanners draw from the speech in advance of the budget on 15 March?
The taxation of earnings from work
There is a long-held belief that income tax and national insurance contributions (NIC) make people reluctant to work overtime.
“It is very generally agreed that the incidence of Income Tax upon the medium paid wage-earner and the lower salaried members of the managerial and technical staffs is such as to act as a disincentive to greater efforts in production,” according to a House of Commons Debate on 6 April 1948. This ‘belief’ has continued into the 21st century.
The original approach to the perceived problem was to introduce ‘earned income relief’, which exempted a significant proportion of the income of lower paid employees (and the self-employed) from tax. Earned income relief was discontinued in the 1970s and replaced by a substantial reduction in the basic rate of income tax.
Then, towards the end of the last century the UK tax system began to favour investment income over earned income. The first steps in this change were the introduction of TESSAs (Tax Exempt Special Savings Accounts) and PEPs (Personal Equity Plans). These were eventually transformed into ISAs (Individual Savings Accounts) and these vehicles have proved extremely attractive to investors.
More recently the government has introduced a personal savings allowance and a dividend allowance that effectively make a substantial proportion of most individual’s investment income free of income tax.
Added to this is the plethora of tax reliefs offered to investors in VCTs (Venture Capital Trusts), EIS (Enterprise Investment Schemes) and SEIS (Seed Enterprise investment Schemes).
How tax might change
Will the fiscal pendulum ever swing back to supporting the worker as opposed to the investor?
There are certainly lots of calls for increased workforce participation and greater productivity, so we might expect taxation decisions to try to encourage those.
Assuming that the Chancellor, Jeremy Hunt, can’t afford tax giveaways in the forthcoming Budget what could be done to encourage people to work more and longer?
Two modest measures might help.
During lockdown employees were given a tax deduction of £6 per week as a ‘working from home allowance’. The lessening of the impact of the Covid-19 pandemic saw this allowance removed though it is still available in some, tightly defined, circumstances.
Could this allowance be reintroduced? There might be a need for some restrictions on its availability, but it would be a welcome move.
The second measure would see an increase in the money purchase annual allowance (MPAA). The MPAA is a restriction on the amount that can be invested in a pension after a pension arrangement has been ‘flexibly accessed’.
It is effectively a £4,000 cap on pension contributions. Although intended as a measure to stop tax and national insurance contribution (NIC) avoidance, many workers were unaware of its wider impact. Increasing the cap to £10,000, its original level, would assist many workers to rebuild their pension pots while not opening significant tax avoidance opportunities.
We’ll find out what’s really in the red box on 15 March. But even if what comes out of it does not “reduce the burden of taxation on working people”, all financial planners should be prepared for plenty of questions about taxation going forward.
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