I hated school. So as a 12-year old I took the rumours of a ruthless new headmaster to heart:
- “He’s going to make us all wear bright blue blazers, bow ties, and caps.”
- “Girls will be separated from boys except at break and lunchtime.”
- “At his last school they had extra classes on Saturday mornings.”
- “He’s into caning, and we’re all going to get it.”
Of course none of this happened when the incoming man took up his thankless position. Though, looking back, the level of lawlessness at my big comprehensive did decline once the top slot was occupied.
As a nerdy if rebellious pupil, a stricter headmaster was good for me.
More physics, less fistfights.
But then we typically dread what might happen more than we suffer when it does.
Our imaginations – whatever our age – are uncapped by mundane reality.
Not my precious!
Alas, the new Labour government – and their nightmare-conjuring critics – are not dealing with fantasy.
Hemmed in by politically-motivated red lines on income tax, national insurance, and corporation tax, if chancellor Rachel Reeves wants to raise revenue then she has to go for somebody’s favourite tax relief, shelter, or break.
That might be inheritance tax. Or higher-rate pension tax reliefs, as debated in Monevator comments. Niche areas like ‘entrepreneur’s relief‘ or the way that private equity income is taxed as gains. The still fairly niche capital gains tax (CGT). Restrictions to ISA pot sizes or the annual ISA allowance.
Pick your poison: “Somebody is going to get it”.
The struggle is real
Let’s agree we don’t yet know what’s coming for sure.
These people aren’t idiots, unlike their predecessors from two or three administrations back. Their politics might not align with yours – nor mine exactly – but they’ve seen austerity has its limits and know growth is what the UK needs.
Yet they’ve inherited an impaired public sector where for a while people even wondered if an ambulance would show up in an emergency – versus expectations inflated by Brexit baloney about £350m a week for the NHS.
That didn’t happen. Just like immigration is higher, there’s no trade deal with the US, and any real economic benefit that might have eased giving up frictionless trade with Europe is notably absent.
The State collects around £40bn a year less in taxes than we’d have expected if we’d stayed in the EU.
I know some of you don’t like to hear it. But the impact doesn’t go away just because it’s boring.
Economists said Brexit would damage the UK economy, and here we are scrabbling for cash.
Of course there’s also been the massive hit from the pandemic, higher borrowing costs with higher interests rates, an increasingly job-shy population, and the energy market roiling war in Ukraine.
Oh, and the pensioner ranks continue to swell, leaving fewer workers to foot a growing welfare bill:
Source: ONS
Beyond the Punch and Judy show
Whatever your politics, it’s clear the UK is living beyond its means.
The Conservatives froze tax thresholds for years and dragged millions into the higher-rate tax bracket.
We all know they’d have cut taxes if they could.
Yet they left office with the NHS elective care backlog approaching a record 8m even while the tax burden was at the highest level for at least 70 years:
Source: ONS
There’s undeniably an issue here.
You want higher economic growth instead of tax increases? And something done about UK productivity?
You and me both. And Reeves and Jeremy Hunt for that matter.
But it’s far easier said than done.
Reversing Brexit would help, eventually, if we ignore the impact of all the division it would cause, and the further cost to business of undoing the border-related investments it had to make.
But frictionless trade with Europe is surely off the table for a generation.
The State could be shrunk, but goodness knows what’s actually achievable.
Perhaps we could throw in the towel on military spending? Accept we’re a middle-order player on the global stage, with influence that will only shrink as China, India, Indonesia – and eventually even the likes of Nigeria – advance?
Good luck getting that past Barry Blimp. Even I don’t think it’s wise while war rages in Europe.
As for trimming welfare spending, just look at the pushback against means-testing the winter fuel allowance for pensioners.
Logically a sensible measure, if we have to cut spending. Yet so unpopular it will possibly be reversed.
There’s a reason the state tends to grow inexorably over time.
The precautionary principle applied to taxes
Personally, if I was Reeves I wouldn’t change anything, except perhaps some loopholes such as carried interest on private equity.
(Even that’s of debatable benefit – it would surely lead to capital flight, and perhaps lower tax revenues in the long run. But it would throw a bone to the notion of taxing the richest, without doing too much wider damage.)
Instead I’d probably rely on extending the freeze on tax thresholds, and the resulting drag bringing yet more workers into the higher-rate tax bracket – even as inflation also pushes up the price of everything they need to pay for.
I’d borrow to make up the difference, at the cost of slightly higher yields and rates.
No, I don’t like it either. But it’s probably better than throwing cold water on the economy with taxes that target wealth creation.
Because we really really need to grow GDP.
Do we face a capital gains tax rise?
Maybe all this pre-Budget fear and loathing isn’t entirely bad news for the state coffers.
If people see less point in saving because of higher taxes or lowered reliefs to come, they’ll spend more money today.
That could boost growth now, at the cost of future gains. And at the cost of future tax receipts too, as a smaller pool of pension assets, say, will ultimately mean less pension income to tax in the distant future.
But Reeves might decide that’s a problem for next generation.
This logic – more money now, and hang the long-term consequences – is why there’s so much noise about capital gains tax (CGT) rates being lifted.
CGT is only paid in any given year by a small slice of the population – fewer than 3% in any given year.
So the vast majority of people who will never pay CGT can take an “I’m alright, Jacinda” attitude to the wealthy getting clobbered – and presume it’s a costless tax hike to them.
Rich versus poor. Elite versus everyone else.
It makes CGT the perfect battleground tax.
Rates up, receipts down
Of course, we know that there will be a cost for everyone to jacking up CGT rates, whatever the offsetting rewards that HMRC is able to collect.
For starters, take the notion that equalising CGT with a person’s income tax rates – so 40/45% at the highest band, from 20% today – will simply double CGT revenues towards £30bn.
Even in the short-term, some people simply won’t sell if rates rise. They’ll hope for better rates to come – or find another way to realise their assets, such as running their business for income.
Others will sell in advance of higher rates if they’re given advance warning. They’ll take a 20% tax hit upfront instead of a future 40% whack.
This might seem helpful to a cash-strapped government in a hole today. But it probably won’t do much for long-term revenues, unless we presume any realised gains will go back into investment, rather than being spent on foreign imports and holiday homes abroad.
A heroic presumption, given the climate will be seen as increasingly hostile to investment, at the margin.
You can see how higher CGT rates could eventually reduce the total capital gains tax take.
A rich take on a capital gains tax rise
Talking of overseas, while I’ve been told ‘the rich’ are set to leave the UK every year since I was a nipper – even as we gained more than our fair share of millionaires – it’s true capital is flightier than labour.
Monevator readers with perhaps a few tens of thousands invested outside of tax shelters will find the notion of re-domiciling overseas to avoid a 40% CGT hit an easy pass. It won’t be worth the hassle.
But if you’re a business owner, say, with seven/eight/nine figure assets that you expect to dispose of someday – or even to reduce steadily over time – then the equation is very different.
Moving to Monaco or the Bahamas to save millions could be the easiest money you ever make.
It’s complacent to assume the UK is such a great place to live that they won’t do it.
At the least it’s less attractive to the mobile wealthy than it was when a British passport enabled you to live anywhere in Europe – and potentially arbitrage over time into other European countries’ tax regimes, too.
Schools are often brought up as an obstacle. But there’s already an army of foreign kids in our public schools. Why wouldn’t our own wealthy would-be emigres do the same? Sending your kids abroad is very normal in wealthy circles elsewhere in the world.
True, ISAs are peerless tax shelters that lose their tax-shielding status under other jurisdictions.
But again, ISAs are far more meaningful to the averagely wealthy than the properly rich.
Will a hedge fund manager, pop star, or factory owner really be swayed by losing a £20,000 a year ISA allowance (and the wrapper around whatever is in their pot) if faced with a multi-million pound CGT hit?
From the LSE:
More than half (52.2%) of all taxable gains in 2020 went to just 5,000 people, who received an average of over £6.8m per person in gains.
That’s really not many people deciding to move abroad to make a difference in the numbers.
Squeeze them until the pips squeak!
Some people will say “sod them”. Paying taxes is your patriotic duty, they’ll argue.
A cynic would note they’ll argue this less when HMRC comes for them. (Pension relief, anyone?)
But for now, losing a few oligarchs and other pampered princelings (yes I know this isn’t accurate) may seem a small price to pay to ‘save the NHS’.
Well… fine.
Except that firstly, even doubling the CGT take to £30bn a year won’t fix the public sector. Were it even possible from jacking up rates. Which it’s not, for the reasons I gave.
And secondly, long-term we need economic growth and that means we need a dynamic risk-taking economy that encourages entrepreneurs and investment.
I’m not one who says all tax is theft or whatnot.
But when even a Tory government just left office with taxes at the highest since World War 2, we must ask whether enough is enough.
If not for moral or philosophical reasons, then simply out of self-interest.
The best – and I’d suggest only – way to generate CGT receipts of £30bn a year sustainably is to grow the economy such that many more of us are making big capital gains (and higher incomes for that matter), and paying taxes at reasonable rates where we don’t blanche and decide to take cover instead.
In the long-run, economic growth (with productivity growth) is everything.
And a capital gains tax rise will hardly encourage the investment Britain needs to further that agenda.
But that doesn’t mean politicians won’t do it. Plenty of countries have higher headline CGT rates than us:
Source: FT
Higher earners versus the wealthy versus the rest
The counterargument that justifies a CGT hike is that you must fish where the fish are.
Britain is a mediocre country for wealth, outside of the London and the richest cohort. And the latter have been getting ever richer.
Yet the better-off – as defined in income terms – are already paying a vast share of income tax:
Source: TomHCalver / Sunday Times
What is arguably undertaxed in Britain – whether by design or the machinations of those affected – is wealth.
And while hiking CGT has its issues, it does at least target (some of) those with the most assets.
Reeves has previously made comments that she understands a capital gains tax rise isn’t optimal, stating on the BBC’s Today programme in March 2023:
“I don’t have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money.“
But maybe she’ll decide she has no choice.
Action stations ahead of a capital gains tax rise
We’ve written a lot about capital gains tax over the years.
Have a read of:
- Capital gains tax in the UK
- Capital gains tax on shares
- Defusing capital gains: a worked example
- Tax-efficient investing in the UK
- How high taxes reduce your returns
If you’re thinking about selling buy-to-let property ahead of a CGT rise, look for articles from specialists. Property is lumpy and illiquid and you can’t stick it in an ISA. But other measures may apply.
Clearly all our CGT information could be out-of-date once we see Reeves’ autumn statement.
Set a calendar reminder for Budget day on Wednesday 30 October!
Action stations
Should anyone take action ahead of knowing whether we’ll actually see a capital gains tax rise?
My crystal ball is as foggy as yours.
We do get these fears about inheritance tax, pension reliefs, and the rest every year. Scaremongering is an asset-gathering strategy of the financial services industry, even when its claims are well-founded.
I’m sure everything being fretted about won’t come to pass. But too much has been floated without official pushback for something not to happen.
If you do believe you’ll be in the CGT firing line and you want to take action, act sooner rather than later.
Reeves might impose any changes from midnight on Budget day. There’s a precedent – George Osborne did it with his CGT hike in June 2010.
Clearly the aim would be to stop tax mitigation if the changes were scheduled for the new tax year, starting 6 April 2025.
But again, nobody – probably still not even Reeves and Starmer – knows exactly what is coming.
Big picture, it seems counterproductive to me to forestall investment or have people dump unsheltered AIM shares, say, if you’re also trying to promote a vibrant UK economy.
But politicians follow a different calculus.
Perhaps they hope the fear of a vicious budget will offset teeth-gnashing over a mildly unpalatable one.
What are you doing ahead of a capital gains tax rise?
I’m curious what the Monevator massive is thinking.
We do have a few multi-millionaires in our ranks – and a majority of our readers declared themselves to be higher or additional-rate taxpayers.
We’re clearly wealthier than average, and we’re into investing. Squarely in the firing line, if wealth tax worries prove accurate.
Let’s have a poll:
As always, I know this is a crude approximation of a complex array of choices. Just pick the nearest and most honest answer. Ideally give your reasons in the comments. And please don’t bluster about moving to Singapore to avoid a feckless socialist takeover if you know you’ll never go anywhere in practice.
Looking forward to a constructive discussion!
Just a general passing thought about the very large swing from the right to the left at the recent general election, a left that is now holding the purse strings.
Is it not the case that the Conservative majority from the previous election had been “artificially” swollen by the Brexit effect, and that the loss of that majority was more of a regression to the norm than a sign of a seismic change in voter thinking?
@Factor — Perhaps that’s the case. However the reason I banged on the data at length in the first half of this article is to try to show that this isn’t just a case of a Labour party getting into power looking to hike taxes for idealogical reasons.
Our economy really isn’t big enough to support our spending.
One might say cut spending, but as I wrote about just look at the outrage over the winter fuel allowance. There’s only so many semi-mythical Vegan Outreach Support Officer positions that can be cut, and I’m pretty sure the squeeze under the Conservatives saw much of the froth blown off.
As our own @ZXSpectrum48K explained well at the weekend, people need to grasp the scale of the issue.
A big topic!
I think it probably makes sense to take profits on anything liquid where you have a 100+% gain. But try & buy back in a month, or switch into an equivalent. CGT’s not going to go down, I’m pretty sure, but there’s a reasonable chance it will go up. If it stays the same, then frustrating, but if CGT goes up, it will have made a difference, and you’ll have reset the clock to zero again.
Small point, but I slightly disagree on the rich leaving because of schools. The reason non-UK people send their kids abroad here is BECAUSE the schools are the best (University may be a different matter…). I still think that english-speaking private equity/hedge funders etc with children would rather be here than most places except maybe the US (& even there depends on your view on guns/abortion etc.). London is far from perfect, but it’s still more attractive living than Frankfurt/Paris etc for most global elite families. If anything turns them away, more likely to be London gridlock traffic imho. Sorry, long ramble for a small point…
Good luck to you all! And it’s better to have gains to pay taxes on than losses!
I believe a lot of the talk about the wealthy moving abroad due to tax increases is predominantly just bluster. Many things tie people to their home country, not just the financial implications of living there. Whilst the UK may not be the best country or even in the top 10 to live, it is a lot better than many alternatives.
I have assets in taxable accounts but not a significant amount of my wealth. I just withdraw the income from them and have no intention of selling. Therefore I am unlikely to be liable for capital gains tax. If by some chance I do get a tax liability, I will smile, thank god I was not born in some god forsaken country, and pay my dues. The country is bankrupt and something has to give. If need be we will all need to pay more tax to fund the lives we have come to expect.
@tom_grlla: You wrote:
I’m not sure where the disagreement is exactly? 🙂 All I’m saying here is that rich people sending their kids abroad is far from unheard of. If British rich people haven’t previously felt the need to do it because they’re already where the schools are, then that’s fine. I’m just saying if I’m an entrepreneur who can move to Monaco and save several million pounds at the cost of having to send my kids back to the UK for 30 weeks of the year (where such kids would probably in private school anyway, realistically) then perhaps I’ll decide to join them?
@Gfour — I hear you, and I’m ready to pay a bit more tax too. However I would caution against thinking it’s all ‘smile and be happy’ because capital gains are just luck.
I spent the best part of a decade managing down a huge capital gains tax liability I’d built up in unsheltered accounts because I’d been saving like a maniac for a house deposit — and I didn’t appreciate the value of ISAs until my early 30s, and sizeable taxable gains started to emerge on my holdings.
Lucky me, you might say. Except that the majority of my friends who instead bought then-cheaper London property (in almost all cases with parental support after about 1998) faced no capital gains on their property rises (which I was trying to keep up with).
Rather, while I didn’t join them on fancy holidays or in buying the best threads, and instead kept saving, they eventually even modestly remortgaged to enjoy a (materially) richer life.
I’m not asking you to feel sorry for me, obviously (not least because I managed to mitigate most if not all of the gains I accrued).
I’m just saying that the thought of paying 40% (or more) on what to me was earned through very genuine sacrifice would have stuck in the craw. Obviously many other people will feel the same.
This is much in my thoughts at the moment; I’m in the annoying situation of having some modest crypto gains (so outside tax wrappers), while at the same time still having plenty of annual pension and ISA allowance left. If I could sell, pay tax at 20% then rebuy the equivalent inside the wrappers it would be a no-brainer.
Excellent and balanced article. I do have some unsheltered investments (long story), but am unusual perhaps in that I am a basic rate tax payer. I’m not doing anything currently. I’ve made a point of only buying holdings that I’d be happy to hold forever, but don’t rule out small sales to make use of whatever allowance is still available.
With all the talk of what could happen to pensions (NI on pension withdrawals?) I wonder if the time might come when it could make more sense to reduce or stop pension withdrawals and whittle down the unsheltered accounts by living off the income / crystallising gains. It’s increasingly challenging to plan ahead.
On a personal level I’m more worried about what could happen to ISAs, but generally I worry that increasing CGT will discourage risk-taking at a time when, as you say, we really need to boost growth.
It’s unfortunate that the government boxed itself in on income tax. The advantage of increasing taxes that are paid by the largest numbers is that it isn’t necessary to increase them by much to raise a large amount. Getting more people off benefits and into employment is also essential to support growth, reduce welfare spending and increase tax revenues.
On spending, I get that it’s very difficult to make cuts in the public sector, but that doesn’t mean it shouldn’t be on the table. For one thing, people tend to be more sanguine about paying taxes if they can see that the money is being spent effectively. The ‘broadest shoulders’ have already seen their wealth and income reduced by inflation and fiscal drag, and there is a point at which taxation feels more like confiscation.
I’m sitting on a £70k gain on my one BTL, so don’t expect much sympathy. Except that it represents a 200% gain over 30 years – hardly more than inflation compounded over that period. And when I bought it I worked for a charity which didn’t offer staff pensions, personal pensions for the masses scarcely existed, rules were very different (annuity the only option), costs were huge, and choices limited.
Bed and ISA getting trickier and trickier each year for sure. Will have to start harvesting my chunky gilt losses, so every cloud and all that!
My dad seems to think that CGT thresholds were indeed linked once upon a time so as not to tax inflation, anyone confirm or deny?
I’m desperately hoping ISAs are “safe”. I’ve saved into S&S ISAs for many years on the clearly & consistently communicated basis that they would be tax free on the way out and uncapped. Fairness is a word which means something different to each person using it and to each situation, but to me it would seem ‘unfair’ to change the rules here so fundamentally ‘half way through the game’. A similar, but less forceful, point could be made for the principle, as hitherto applied, that pension contributions attract relief at the highest nominal rate paid. I voted for them in July (and previously), but if Labour seriously muck about with ISAs and/or PPR on houses then it won’t just be their newly won over ‘blue wall’ who they’ll alienate but also a very large swath of their own supporters. I think it could even end up costing them reelection in 2028/29.
On CGT equalisation with IT rates, this seems all but inevitable now.
It’s been so heavily trailed by the Treasury that they will surely lose credibility if they don’t do it.
I wonder if Rachel Reeves will keep the £3,000 p.a. CGT allowance and, in any event, what she’ll do, if anything, on dividend income rates (for dividends received outside an ISA or a SIPP).
There’s also the de minimis £500 annual dividend allowance.
I haven’t seen either of those things mentioned in the press yet.
On the basis of the precautionary principle, I’ll be liquidating my shares in the GIA before 30 October (my net gains will be below the £3,000 allowance) and putting the proceeds (as I’ve fully funded my ISA and SIPP for this tax year) into a ladder of low coupon conventional gilts. [I’d use ILGs but my platform tries to charge telephone dealing rates to buy them, which I’m not prepared to pay].
As the gilts mature (with the capital gain tax free) they’ll be used to fund that subsequent tax year’s ISA and (dependant upon what happens on pension tax relief in the Budget) SIPP contribution(s).
If an axe gets taken to HR (and AR) relief on pension contributions, then I’ll be looking at VCTs, EIS and SEIS.
Not my first choices for investment vehicles to be sure, but needs must.
I graduated in 2010 in a STEM field. The continuous higher tax rates, along with the student loans collections, has seen my marginal tax hitting 52% at points (higher rate 40%, NI 2%, SL 10%). I’m all for paying my way, but it is hard to shake the feeling that a lot of what I’m paying for is the largesse of previous generations and a not insignificant level of poor gov tenders borne out of idealistic imperatives to privatise assets.
As it stands, I was a keen Labour supporter and voted against a range of austerity measures. I understand the challenge the new gov faces, but my partner and I are now approaching a situation where the next promotion either of us makes will put us in a scenario where it makes tax sense to just take the promotion overseas in our respective global firms as there would be minimal impact to our final living standard, especially as either should be able to quickly land a semi-decent role.
Its frustrating to admit, but having never really worked in a non-Tory government i think i’m just burnt out on ever increasing tax levels and further deteriorating public services and I can’t really bare to continue hampering my march towards FI in favour of supporting GB PLC.
i do feel sorry for the Labour gov as I don’t feel alone in this – a number of friends and colleagues are looking at global relocation so they can finally start a family. This is an issue caused by the departing gov, but the effects will fall well within the current govs tenure. I’m not even sure how they can avoid it. There’s certainly an appetite within my age group to see almost punitive taxation regimes brought in to hit high networth individuals – especially those that have managed to remove their own monthly anchors (mortgage paid off, high value homes, multiple unit owning landlords etc).
It’ll be interesting to see what happens as the generation who was brought up during the huge bull market of ’08 onwards only to hit their financial maturity around 2018, and therefore miss out on a lot of growth but still face the reduced purchasing power, gain a larger tract of political power
@TI:
I do feel your pain, however, we do fundamentally disagree on capital gains being “earned” as you say. They are firmly unearned gains in my opinion. So while I agree sacrificing your pay to make savings is “earned” in as much as the actual initial deposits or investments go, imho, the gains are not “earned” and we all may have to accept greater taxation of our lucky/skilfull saving or investment policy outside of tax shelters provided.
The point about CGT on our main homes is an anomaly which is probably separate to this discussion and is subject to the political whim to encourage home ownership I think.
Rhino: Yes Gains were once upon a time indexed to inflation so only the real gain was taxed.
I agree with your main thrust – that if growth is what is needed, austerity has to be ruled out because it prevents growth, and the realistic options for increasing taxes are limited so there has to be increased borrowing.
But politically it would be a bad look to rely totally on borrowing and I imagine the budget will involve some increase in taxation as well as borrowing. Almost certainly not as much as the dire predictions, but of course that doesn’t mean CGT won’t be affected.
In practice government borrowing means people saving – that’s where the money comes from. And that means us, whether directly with Premium Bonds or indirectly via pensions or funds/ETFs which include money in government bonds. Which ought to mean that any tinkering with ISA or pension allowances is insufficient to deter savers.
The trouble with extending the freeze on tax thresholds which you propose as the least worst option is that it has already been overdone. Even the Tories realised that, with the admission in the election campaign that they were set to tax state pensioners (curiously portrayed by them as a Labour decision when it was 100% Jeremy Hunt). It is one example of the awful lot of taxation that needs tidying up, but it is difficult to see that doing so will raise significant revenue.
Selling a few GIA holdings mainly ones that i think are ripe for selling. 200k or so (100k of gains) over a holding period of 6-8 years.
Not sure whether it will be worth it – if CGT only goes up to 25pct or even 30pct the benefits will be small, because CGT encourages you to hold stuff forever:
10k grows to 40k, 30k gain taxed at 30pct, 9k cgt, 31k nett.
10k to 20k, gain taxed at 20pct, gives 18k. 18k grows to 36k, 18k gain taxed at 30pct, leaves 30.6k… slightly less…
@TI:
Broadly agree with your take, especially comments re fiscal drag – which has the additional benefit (for the politicians) of seemingly being easy!
Possibly worth checking out this (re your job shy observation) though: https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/economicinactivity/timeseries/lf2s/lms The rate has been pretty stable for > 50 years, with a slight decline if anything!
FWIW, I have brought forward the actions I usually do towards the end of the tax year with the explicit objective of completing them before the end of October. This is not without some risk to me, but I decided on balance it was the way to go. Could, of course, be wrong – but so be it!
Will finish with my usual plug: the best explanation [by far] I have seen recently of the UK’s overall economic situation (albeit it is pure text without any graphics/pictures) is Paul Johnston’s recent book:
https://www.amazon.co.uk/Follow-Money-much-does-Britain/dp/1408714019
@Delta Hedge there were clear rules on indexation, lettings and private residence relief (if, as I did, you had lived in a property you subsequently let), but it didn’t stop them being changed in a way that affected gains already accrued. Or changing the annuity rules in the opposite direction. Fairness doesn’t really come into it.
Expecting the lost Brexit revenue seems forlorn. Your comment that rejoin might not be for a generation looks, sadly, more likely every time Kier Starmer opens his mouth. There is a principle that Parliament cannot bind itself. But he’s having a jolly good try.
Now he seems to be putting faith in the SEZs generating growth. It’s not my area of expertise. But I think it odd to create low tax zones and expect an income from them.
@ JB(#10):
Re: extending threshold freeze:
Just introduce a higher PA for pensioners – which used to be the case anyway. Such moves could then easily be spun as not increasing income tax [rates] for workers and introducing a better system that negates the removal of the WFA for most pensioners! But what do I know.
@Al Cam, neat solution although if they wanted to do that it would have made sense (politically) to pre-announce it at the same time as the loss of fuel allowance. I hadn’t realised pensioners ever had a different personal allowance.
Agree with most of that.
In austere times it is imperative that a perception of fairness prevails. Don’t mind taking a hit as long as the pain is uniformly applied.
Differential treatment of public sector workers would be an issue ( nice job security and pension too..).
Did you mention the unfunded public sector pension liabilities?
My advice for the younger generation ? Stuff productivity, get a job with the civil service (cf. Scotland where, I believe, more than 40% of the working population suckle on the public purse. Add those on permanent benefits to give what the remainder of the populace must earn).
CGT ? Most is in ISA’s ( fervently hope these are not in the cross-hairs other than a reduction in the annual allowance which seems foolish at 40k for a couple).
However there is a trust for which the cgt allowance is half the personal allowance, ie £1500, and it isn’t clear who pays any cgt. Hence an ossified portfolio. For that I am intending to harvest what I can pre budget.
@Rhino #8
> My dad seems to think that CGT thresholds were indeed linked once upon a time so as not to tax inflation, anyone confirm or deny?
It was. Be careful what you wish for. The computation sounds like a world of hurt in record keeping.
@TI house-keeping comment: the comments on this seem to be all over the place, with new comments appearing earlier in the chain. I can’t see any comment from tom_grlla which you, and others, are replying to?
@Martin T — Re: @tom_grlla’s comment, I have just retrieved it from the bin. I hope he didn’t put it there! More likely I put it there with some fat-fingered moderation.
Re: New comments appearing earlier in the chain, this happens when the spam system marks something as spam (not even ‘potential spam’) and I’ve manually retrieved it. I usually manage to look in that bucket about 3-4 times a day, and have to wade through a lot of rubbish to find it. The system then reinserts it at the time of posting. It’s far from ideal but it’s a small number of comments and better than them getting deleted I feel.
I recently closed comments on all articles more than three years old — with some regret, as we often got interesting ‘real’ comments on very old articles.
But I was spending more than 30 minutes a day in the worst instance on this non-spam retrieval, so something had to change!
At some point I hope to make time to see if there’s a superior technical solution. 😐
@ taxing basic state pension
There’s a neat way to resolve a few issues:
– declare basic state pension will always be lower than the tax free allowance, in exchange for
– changing triple lock so that basic state pension is linked to a maximum % of median earning say 33%. They can have inflationary increases, earnings increases and possible even a 2.5% Lower threshold SUBJECT TO not being more than 33% of median earnings
– while we’re at it there should be a rule that pensions credit can’t make you better off than someone on full basic state pension, including all the bells and whistles
Ps
– age related tweaks to tax free allowances are too risky given age discrimination etc
Fingers crossed for Labour JUST halving the ISA allowances going forward, I would take that as a win.
Nicely written article, very balanced and rational. Evidently there is some serious pill swallowing to be done and we hope it is distributed fairly albeit no doubt perceptions of fair vary dramatically. Personally I’m with the various commenters crossing fingers that ISA’s get through.
I identified as an active seller in the poll but would add the potential for a CGT rise was a reason to get on with various things rather than the fundamental motivation for doing them.
Sold a decent sized QQQ holding, mainly tactically but somewhat influenced by the budget and the position’s gain. Likewise decided to cut the remainder of a fund I had previously intended to chip away at with the CGT allowance and any losses that were available.
Also recently sold my 2 rental properties, mainly because I would prefer to flagellate myself than be a landlord any longer but the CGT consideration possibly reduced price sensitivity and increased urgency.
@Ermine. The previous cgt regime, which worked (but not to Gordon’s satisfaction) used published indexation allowances. It was easy enough.
@TI #24: re spam solutions: suggest a £1 p.c.m/£5 p.a./£10 lifetime charge option to post comments for non-Mavens and non-Moguls. This should eliminate 99.9%-100% of spam, but still be both low enough not to put people off commenting and, at the same time, also sufficient to encourage non-members to think about the Maven tier.
@All: I’ll miss the periodic exercise with the GIA of selling holdings to use up the former (generous) £12,300 p.a. CGT allowance, and then buying something new and different in their place.
It led me to invest, from time to time, in ideas which I’d otherwise not have, such as reinsurance (e.g. Catco Reinsurance Fund, sadly no longer available due to PRIIPS regulations and need for a KIID) and various UK small cap ITs and funds.
In the ISA and SIPP, in contrast, without any CGT considerations to plan for, it’s overwhelmingly just ‘boring’ vanilla trackers and long term buy and hold. Much less interesting.
I am trying to understand how an LTA cap on ISAs would work. Would any crystallised gains be exempt? If so, selling positions in ISAs before the end of October would also make sense (much like for pre-emptive sales to avoid a hit in GIAs due to the cut in the CGT allowance)? I have all the money I’ve saved in ISAs. I am getting very anxious.
I have realised a few gains, last tax year, and may do the same again before October. Maybe it will be to no avail but I just think the 10% tax on gains is ridiculously low and if I were in charge I’d raise it! Still plenty of gain to be taxed when these assets are sold (which they likely will be in the future)
@vortexgently – I’m loth to “suggest” this, but the way I’d do a ISA LTA which would simultaneously “protect” existing ones, so as to not be retrospective (if this mattered) would be….
At the end of every tax year all your ISA platforms send you an statement of the value of the ISA. If the combined value is over, say £200k LTA, your ISA allowance in the subsequent tax year is £0, otherwise it’s £20k.
There should be an option selling assets which are at loss to carry over the losses so not have to pay gains in the future 🙂 but I guess that doesn’t matter as much.
@Finumus – Yes, that seems relatively simple to implement! I
It’s not just the possibility of being taxed on the non-crystallised gains on stocks that have increased in value over the years in my ISAs that is getting me anxious. I fear that I will not be able to find out what the initial cost of my shares was, as these were acquired in accounts that were “transferred” following dealing platforms/services mergers. I was young and because all stocks were within ISAs, I failed to request the paperwork relative to the initial transactions.
I’ve held some of the shares for 15 years or so. The current broker only shows gains relative to the value of the last transfer.
This is going to be a real nightmare. I’m not sure how I will get out of this situation. I don’t know the initial prices I paid for the vast majority of shares that I have in my ISA at the moment.
I am tempted to sell before the end of October just to avoid getting into trouble because I don’t have any documents relative to the initial transactions.
@Ramzez #32: This is NOT tax advice (nor any sort of other advice). Please consult HMRC’s published manual of guidance for CGT, which is available online.
Those caveats aside, my own understanding is that you can do this, and claim the losses in your tax return within the first four tax years of incurring them (IIRC the four years includes the tax year in which the losses were made), and then carry those losses (once claimed) forwards indefinitely to use against gains in subsequent tax years. You have to claim the losses first (within four tax years) though before carrying them forwards.
Of course, this may all change in the future (perhaps as soon as 30 October!)
I read somewhere, I think a Treasury or similar document, that increasing the CGT rate was unlikely to increase revenue much as avoidance by delaying disposals would increase. The document indicated that it is quite hard to push up the rate much more without reducing revenue, so maybe 25% or 30% is the highest they could go. 40% seems unlikely if the aim is to increase the amount of tax coming in in the short term. The previous government actually reduced the top rate on property from 28% to 24% and estimated that this would bring in more tax for the first few years but make little difference in the longer term.
The ETFs we have in GIAs have quite significant capital gains, eg I have a section 104 holding of a S&P 500 ETF with a gain over 300%. If I sold some of the position “just in case”, paying 20% CGT and bought another ETF, that would reduce the capital value and the future dividend income by about 15%. Paying capital gains tax before we need to could easily result in higher CGT overall even if the CGT rate went up to say 30%. It all depends on future gains and when we sell (if ever), but the cut in the dividend stream would happen immediately.
As we have no forseeable need to sell GIA ETFs we plan to just continue to hold, with the aim of eventually leaving it all to charity. Charitable donations of shares are currently free of CGT.
@Boltt do you actually mean ‘basic state pension’? This term applies to pre 2016 retirees, when SP had two components, basic and additional. Basic SP is well below the personal allowance and will be for some time I think.
Post 2016 is called new state pension and it’s that that will soon breach personal allowance.
But since literally millions of pre 2016 retirees already have a SP above the personal allowance I think this whole row is manufactured nonsense.SP is taxable like other income, no reason why it shouldn’t be.
And as for an extra tax allowance for pensioners- that will simply be a tax cut for every pensioner, many of whom are very wealthy. Pensioners already get treated very well by the tax and benefit system- no NI!! – compared to working age people
There’s a potential for a large one-off capital gain to occur in the future from a sale of private company shares. There will be some notice of this as the deal will be “agreed” but there will be a circa 8 month period before the regulator approves the transaction.
After a very brief look, it seems like it might be possible to spend half a year on the Isle of Man to become tax resident and then have 0% CGT. Then you can move straight back to the UK. It doesn’t sit well with me, but if the incentives basically say “Take a long holiday somewhere low tax and be many £££ richer” are you a mug for sitting still and giving the UK government 45%?
@TI greatly appreciate the time and care you put into curating this site, and particularly the comments. As such it is probably the most valuable site of its kind, not least for the quality of the discourse.
@Vanguardfan, you are right that many pensioners (such as myself) have total income exceeding the allowance and already pay tax. However the DWP for some reason don’t have a PAYE facility, so that tax is entirely paid from the additional income (e.g. occupational pension or SIPP drawdown). The issue will arise when pensioners who have been in a salaried (but not pensionable) job all their lives so never needed to fill in a tax form have a state pension which exceeds the allowance – in practice they are unlikely even to realise that until they are pursued for back tax.
Monevator readers aren’t representative of the general population, there are many out there with their state pension their only source of income after retirement. They don’t find it easy to manage, and still won’t even if they drift into the taxable bracket.
Always been a basic rate taxpayer. Lived frugally and reached FIRE 10 years ago. All investments now in a personal pensions or ISA. Just qualified for my state pension and have a tiny works pension, so still a basic rate taxpayer.
I’ve planned ahead and worked hard for my future over a 40+ Year working life (started work at 16), but now everything seems up for grabs with this government. Energy allowance stopped. All the talk of what could happen to personal pensions (NI on pension income, reduction/abolition of 25% tax free cash, IHT reimposed on residual pension values on death). Not surprised though given past experience with Labour Governments (spiteful).
Also frozen tax allowances don’t help.
How can you plan for retirement over a 50 Year timescale when the rules keep changing or seem likely to?
Seems like doing the perceived right thing is a mugs game for ordinary people.
I suspect Labour will increase CGT as a way of preventing the big landlord selloff which is currently driving up rents, rather than to create extra tax revenue. Higher CGT does seem to have broad public support even if it is unfair without inflation indexation, but I think the tax experts are right that it’ll bring in very little extra revenue, I for one won’t be selling my BTLs anytime soon (though I wasn’t planning to anyway).
I suspect the real revenue raiser will be on reducing the tax relief on pension contributions, maybe to 30% for those in the 40%/45% earnings bracket, though it sounds like it’ll be a nightmare to administrate.
I quite like the idea of replacing council tax with a 0.5% house value tax. Not a wealth tax or a land value tax per se but a lot fairer than our current bizarre and extremely regressive system. If Labour are going to do something bold then that would be it, and now is the time to be bold rather than tinkering around the edges.
The alternative to higher taxes is just to borrow more, which actually seems quite sensible to me. As individuals we borrow all the time (eg student loans, mortgages), as do businesses, so I don’t see why it should be so frowned upon for the government to do the same. I’m sure it was Gordon Brown who used to say he would only borrow to invest, that seems like a sound principle to me. All this noise about continuing austerity is fairly depressing, though at least if the government increases taxes and cuts spending then that will be deflationary and lead to lower interest rates.
All talk of putting Tory austerity behind us is hogwash. There was no austerity. There was a deficit every year so government debt grew every year.
What’s needed is cuts. First the conventional sort: scrap HS2. Sell the two aircraft carriers. Cancel the armoured personnel carrier that deafens the troops. Buy no more of the God-awful US F-35s. Get rid of regiments of civil servants. Stop pointless treatments and screenings in the NHS. Cut government assets – e.g. sell land – that have better uses.
And then cuts to stupid policies that inhibit growth. Drill in the North Sea. Try fracking. Get rid of the Nut Zero bollocks. Allow the Cumbrian mine for coking coal (I’m surprised that it might be profitable but let a company be the judge of that, not me and certainly not Two-Tier.) I dare say there are policies that could improve, or at least refrain from inhibiting, business entrepreneurship. Try some.
Adopt a rational basis for assessing the risks of low levels of radiation and then build nukes redesigned to take advantage. And so on. Labour has a huge majority and can therefore afford to shaft some of its own supporters for the national good. It should take the risk.
@TI I did delete it! Just on second thoughts didn’t think I needed to go on about stuff like that!
Had forgotten about indexation. A double-edged sword i.e. a nightmare for the calculations – though as long as you have good records, perhaps manageable. But, much more reasonable for longer-term holders (something which I think should be encouraged, though this is partly through personal bias).
@vanguardfan – I meant the new state pension £221 pw.
@ wephway – borrowing to invest can make sense, borrowing just to spend less so.
@ Dearieme – much to agree with, but missed cutting benefits by 50%+ (not joking)
@jonathan B, to repeat, millions already have a state pension which on its own takes them above the level of the personal allowance (about 20% of all those receiving state pension). I guess somehow HMRC manages to tax them correctly?
It’s hardly insurmountable. There’s no reason either in practice or in principle why the new state pension level shouldn’t breach the personal tax allowance. Except pensioner exceptionalism and we have too much of that already imo.
Well, for all those of you above “willing to pay a bit more for better public services”, there’s a nice easy option for you which doesn’t even involve much travel. Just come to Scotland:
https://www.gov.uk/scottish-income-tax
You English with your puny 45% rate on anything over £125K. We have “real mans’ taxation” here in Scotland – 45% bites up here once you’re over a measly £75K.
For those of us Scots mad enough to still not be discouraged and want to work more, we’ve got a “put the hairs upon your chest” rate of 48% for those earning over £125K.
This of course produces some amusing “cliff edges”, to wit:
1. Scottish Government only has control of income tax rates, not NI rates. Those follow English rates, which are basically 12% up to £50K. So, in Scotland, for anyone earning between £43,663 and £50,000, actual tax rate is (Scottish higher rate tax of 42%) + (basic rate NI of 12%) = 54%.
Let that roll around in your head for a while. £43,663 – £50,000 is not plutocrat territory, but puts you firmly in the “broadest shoulders” category in the view of Scottish politicians, and liable to pay a confiscatory level of tax on your income of 54%.
2. Again, you English with your puny 60% effective tax rate over £100,000 due to loss of personal allowance? Pah. Scotland does it properly – as you’re on 48% income tax over £75K, once you add in 2% NI and loss of personal allowance, effective rate of income tax in Scotland once you’re over £100,000 is 67.5%.
Again, let that thought roll around your head for a moment – in Scotland, once you’re over £100,000 (again, not plutocrat territory), you get to keep £2.50 of every £10 you earn.
And despite the record levels of tax in Scotland, the highest funding per capita from central government of any part of the UK due to the Barnett formula, the SNP government are still having to cut services, despite the fact that we should be awash with money.
Scotland is a real life example proving that “progressive” tax policies (and assorted other left wing sacred cows like rent controls) JUST DON’T WORK.
These levels of tax are basically resulting in people reducing hours, taking early retirement and all sorts of other tax mitigating measures. Not exactly going to do much to generate the “growth” the politicians keep banging on about. Amusingly, the government is recoiling in horror at the amount higher rate pension tax relief is “costing” the treasury – willfully blind to the fact that a lot of what is driving that is ever more people being dragged into higher rates of tax due to fiscal drag / frozen thresholds. Government greed is causing the problem it is complaining about. How’s that for irony?!
So I have no time for people who naively think that more taxes are going to fix things. They won’t. Scotland is your proof.
And somehow I don’t think I’ll be killed in the onrush of the usual virtue signallers looking to move to Scotland so they can pay the kind of tax rates they say they want to.
And as for the Patriotic Millionaires and their ilk (https://patrioticmillionaires.uk/), LOL! If they feel so strongly about paying more tax, HMRC make it dead easy to do. It’s right there on the HMRC website: https://www.gov.uk/guidance/voluntary-payments-donations-to-government
I’m not going to be lectured about how I need to pay more tax by
(a) a bunch of politicians expensing their own heating costs while depriving pensioners of a winter fuel allowance,
(b) nor by a bunch of well-off millionaires who could voluntarily pay much more tax to HMRC but for some reason, don’t actually do that,
(c) nor by the leader of the supposed “working man’s party”, who is a millionaire, a KC, a Sir, represents a rich London constituency and has his own act of parliament to exempt him from the taxation the rest of us were (and might again be soon) subject to on our pensions (https://www.legislation.gov.uk/uksi/2013/2588/contents/made).
Rhino @ 9: “Will have to start harvesting my chunky gilt losses”
Gilts are not liable to CGT. I’m therefore surprised that you can use losses on Gilts to offset capital gains. Are you sure?
“Canada has increased its highest CGT rate to 50%, for instance.”
Not really. If you read the article you linked, you’ll see that Canadians pay ordinary income tax rates on 50% of their capital gains. That’s far below a 50% tax liability (well, unless the Canadian marginal income tax rate is 100%.) What we have currently in the UK is pretty much on a par with this, since 10%/20% capital gains tax is half of the 20%/40% income tax rates.
As it happens, around half of the long-term return on stocks is inflationary. That means that the current UK 10%/20% CGT rates align with 20%/40% of the real gain. Put differently, IF the government reinstates inflation uplift (and my guess is that it will not), then applying income tax rates of 20%/40% on after-inflation gains will mostly only generate complexity for zero gain.
I agree with lurker that you’ve misstated the top CGT rate in Canada
@mclovin @Lurker — Eek, thanks for the pointer. This is what one gets from being misdirected by the Reddit crypto board! (True but still sloppy on my part not to read / digest the referred link properly). Will remove from the article and issue a correction on Saturday!
@all — Really enjoying this discussion, cheers! 🙂
@dearime – I *think* that holding gilts via ETFs means you lose the CGT exemption. If this is true, I should be able to offset gains elsewhere with their losses. But could well be wrong. I’m sure someone here will know?
@Rhino #51: that’s right. Got to hold the gilts directly to get the tax benefits.
@Dragon #46: Brilliant post. Thank you. I’d been thinking of Scotland as a retirement destination but your description of the tax situation has put me right off. Is this all down to the SNP or have the Labour MSPs played a role? In light of the tax burden, why aren’t the Scottish Tories more popular? Personally I lean left, but for anti Tory reasons, and I wouldn’t describe myself as a pro Labour (or pro any party). However, from the little the London obsessed media reported of Scotland, Baroness Davidson seemed to be doing a pretty decent job heading the Scottish Tories from 2010 to 2019. Bearing in mind the punitive tax rates and poor public services (as you’ve previously outlined) in Scotland under the SNP and Labour do you have a take on why the Tories haven’t broken through yet?
@delta, SNP tax policy (majority government from 2011, coalition with Greens 2021-24). I think the devolved tax policies came later and it was Sturgeon’s govnt that set them differently from rUK. Not Labour.
@Orion #37 IoM is something I looked at as well in a similar vein – in my case when the far left looked to be getting ready to run (ruin) France where I am based. The UK already has a very attractive tax regime for investors (until that changes) compared with most other countries I looked at but IoM and Channel Islands do stand out with higher personal allowances, lower rates, no CGT and no IHT (no ISAs but could live with that given the rest). To be offset by likely higher cost of living and in the case of IoM a hefty investment in high quality rain gear.
I’ve currently got a mid 6 figure gain in a GIA. I’m not liquidating now and if CGT equalises with IT then I’m even less likely to liquidate. One potential reason to liquidate would be to upsize our house. But that combined with the punitive stamp duty at higher levels means I won’t bother. I’m a example of higher tax rates = lower government revenue.
My plan is to keep accumulating in GIA’s and or potentially an offshore bond / FIC.
Then I’ll just see what happens. I’m ok to leave the UK for five years and not pay any CGT. I’m also ok to go and live in the UAE for a year and withdraw my entire SIPP tax free, which it appears I can do. Travelling the world will be fun.
A wealth tax would scupper this tax avoidance approach a little but I suspect we are a couple of governments away from that being a real possibility. By then I’ll be done.
The majority of people on this sub are well educated, well read and understand the issues. It should therefore be obvious to everyone that unless something unexpected turns up, direct or indirect tax rates are going to keep rising incrementally, the only debate is the pace.
Excellent, thoughtful and balanced high quality article as always, thank you.
I don’t have any CGT liable holdings. Thanks in no small part to Monevator over the years, I’ve tried hard to max out tax free shelters over the past 20 years or so.
I did briefly have a small amount CGT liable a few years after closing a business but that got quickly rolled back into ISAs after a couple of years. CGT holdings are always a ticking time bomb IMHO and need careful planning and management most people can’t or won’t dedicate, so just get stung even if the goalposts don’t shift. It’s a booby-trap. I was very grateful for the excellent articles here about it when I did have to do it, and woe betide anyone who walks into it unaware.
The changes to the ISA and pension caps over the years have made a huge huge difference. Lowering those would implicitly rake in more CGT. Not that I want to pay it, of course. An individual already has an effective £80k tax free allowance per annum (£20k ISA and £60k pension increasing in attraction with age/marginal rate). That’s a lot. If you earn a £100k, you only have around £66k take home so it’s not possible to get near maxing that out. You need to be earning pretty well to fill both each year consistently. For couples with only one high earner, it’s even tougher and for each child there’s another +£9k to find. These are generous limits even for earners into the top 1%.
Curiously, those limits have also increased through time as the country’s economic situation has worsened. While I don’t think correlation implies causation here, it would look interesting to plot alongside some of those charts.
I really appreciate @TI being open and honest about his journey with CGT over the years and getting stung “trying to do the right thing” and how property was incentised by the tax system (the road to hell is paved with good intentions, eh?). But the system is not interested in educating individuals about how to minimise what they pay – rather the opposite even. And often we learn things the hard way sometimes, or just plain get lucky/unlucky. The reality is plain regardless. But this is also a great reason why I love Monevator – because it lays it all out and helps people educate themselves to make better decisions – thank you again.
In a way, the anomaly of CGT being payable on gilts held inside an ETF has worked out well for me! Even though at first glance you would think it was a bad thing. Only the case due to the gilt rout though, which obviously I would rather have dodged if I had been more switched on.
To be a little controversial for a moment, I think we get a very good deal with CGT rates half of IT rates and it would still be a good deal even if they were equalised.
As for the inflationary gains argument, consider returns from a bond you buy at par value, hold for 20 years and receive par value on redemption. The return comes from the coupon payments, which are taxed annually at IT rates. There is no allowance for the effect of inflation within the taxation. Yet we have complaints that an investment that has part of its return in the form of a capital gain should not be taxed at IT rates because some of that return was down to inflation. I really cannot see the argument here. Either both types of return should receive some compensation for inflation or neither should. Why should a capital gain be taxed less than the same gain arising through interest income? Other than the practical reason that aligning CGT and IT rates would very likely bring in less CGT, I cannot see why they should not be aligned.
Furthermore, even if CGT and IT rates were aligned, investors would still be getting a good deal as CGT is only due on disposal, not annually on unrealised gains. That means that income arising from investments held over many years are higher than they would be if unrealised gains were taxed. In addition, by only taxing gains on disposal, investors do not experience the compounding effect of taxation.
I’ve had so many GIA losses in the last few years I don’t care about any CGT rise.
Laughing not laughing.
@Naeclue #58: I think the argument is that income and capital fundamentally are different. A gain to capital carries risk of loss of capital so lower tax rates might stimulate beneficial risk taking. Income carries no risk to capital. And income is income regardless of the inflation rate whereas an appreciation of capital is only economically a real gain if it exceeds inflation. This is why income bearing securities (e.g. gilts strips) which have their coupon removed to create a discount to redemption / par value are / were treated as deeply discounted securities / relevant discounted securities and the gain on redemption is all subject to income tax. The gain in that situation does not represent a return for taking an economic risk with capital.
@All: we seem to have:
– leaving the UK and going non-resident;
– family investment companies (tax deferral only);
– offshore bonds (also tax deferral only);
– EIS, SEIS and VCT; and,
– hoping everything will turn out alright after 30 October 😉
I’m too old and culturally institutionalised to leave the country but I’m hoping the kids will both marry Norwegians and emigrate, seems to me the best bet country out there. Shit weather though.
@Naeclue
“Other than the practical reason that aligning CGT and IT rates would very likely bring in less CGT, I cannot see why they should not be aligned.”
If that was indeed the case, that aligning the rates would reduce the absolute amount of tax raised, wouldn’t that practical reason be a pretty compelling one not to do it?
In that scenario aren’t you knowingly going beyond the peak of the Laffer curve where the poor suffer from less tax revenue available for redistribution in order to deal a blow to the rich via higher CGT?
@Delta, have you not heard of bond defaults or junk bonds? 😉
Some bonds absolutely carry risk to capital. The potential reward for taking risk is a higher return, not lower taxation.
There are of course some investments that do explicitly offer lower taxation for risk taking in areas governments want to encourage, some of which you have mentioned.
Regarding your list, I would say beware of letting the tax tail wag the investment dog.
FICs add complications and will potentially result in higher tax. Corporation tax indexation relief is no more, so all you are really getting now is the ability to roll up dividends free of tax. On disposals you will be charged corporation tax rates, which could be higher than CGT. Then there is the thorny issue of getting money out of the FIC – how are you going to do that without paying more tax?
Offshore bonds – I have not looked into these for many years, but when I did most had high charges and rubbish investments. Again you have to somehow get the money back out at some point and you will be charged IT on rolled up gains.
EIS type structures defer tax, can often be high charging and direct you to investments that you may otherwise not wish to make. VCTs at least are completely tax free, but again are high charging and may not give great returns. I used to invest in VCTs, but the ones I backed were based on a high proportion of secured loans or subsidised renewable energy and were limited life, so you got your money back after 6 years instead of being landed with an illiquid asset that you could only get rid of at a significant discount to NAV. Unfortunately, these types of VCTs are no longer allowed and the risk/return profile of VCTs is no longer attractive to me.
As for leaving the UK and going non-resident, what a faff! I have always found the concept of being a tax exile alien. What is the point of being financially independent if you cannot live where you want to, near family and friends?
ps, you have not mentioned Trusts, which is probably just as well..
@AoI “If that was indeed the case, that aligning the rates would reduce the absolute amount of tax raised, wouldn’t that practical reason be a pretty compelling one not to do it?”
Yes! I would not do it for exactly this reason, assuming the evidence for this was credible. As I said above, I did read an authoritive document,which I think came from the Treasury which indicated there was little to be gained from pushing CGT rates much higher. I am hoping that RR will do what is pragmatic.
@Naeclue, re becoming non-resident,from what I have read if you are a long term UK resident you will remain subject to IHT for a further 10 years after leaving ( post 2025)!
I would recommend two recent podcasts that talked about the fiscal policy options Reeves faces:
IFS: https://ifs.org.uk/articles/how-could-chancellor-raise-more-tax
FT Money Clinic: https://www.ft.com/content/a16a3adb-7b82-49cd-b97f-083aed56ca93
Both feature Dan Niedle and are very informative.
In short, all the evidence suggests that raising CGT significantly is counterproductive and often results in lower tax revenues. This is because people can often choose when to realise gains and will reduce the amount of gain they realise. However, a sneaky chancellor would strongly hint at a CGT rise, causing people to realise gains and then not change rates. That would provide a nice immediate bump to tax revenues to get through a tricky fiscal patch.
Personally, I think Reeves and Starmer should consider breaking the manifesto pledge and raise basic and higher rate tax rates by a few p in the pound (and ideally, though this won’t happen, basic rate payers only, through combining NI and IT). It will bring in the much needed revenues. Currently, median earners in the UK pay far lower direct taxes than pretty much everywhere else in Europe. If we want to have comparable public spending to those countries, then we really are going to have to raise that tax more. broadly.
If you’re going to raise taxes, which it seems like we have no choice to, then as early as possible seems the most politically sensible time to do it.
Anyway, in before they do something crazy like raise CGT and Stamp Duty backed by some wildly optimistic forecasts.
I have been wondering for a while whether we might see more radical tax reform from RR than many are expecting. All I have read so far is that she will tinker at the edges, raising the CGT rate a bit, reducing pension tax saving benefits, extending IHT to pensions, etc. But she could really shake things up a bit around pension and ISA tax shelters and on land/housing. For example, Sweden’s ISK accounts allow account holders to invest free of capital gains tax, but instead there is a tax on the value of the ISK. The tax is set according to the expected return on investments, so if the return is expected to be the risk free rate +/- a spread, the tax would be a percentage of that expected return. e.g. risk free rate of 5%, ISA tax rate 10%, ISA tax 0.5%. Horrible in a way as the tax is applied even when investments go down over a year, but I would still want to hold ISAs and SIPPs if the tax was set at a level that made the ISAs and SIPPs still worthwhile. A 0.5% tax would still make ISAs and pension funds viable.
On housing, she could introduce a wealth tax on second homes of say 0.5% to 1%, redirecting tax raised towards building social housing in the area. I hope it doesn’t happen, but this would only hit “the rich” and would be very popular with locals in many areas of the country.
Re: Share of income tax – it’s important to also look at share of income!
(This may be one of my favourite drums to bang)
The graphs of income tax share always look shocking because the income distribution is (sort-of) logarithmic. In your head, you want to compare it to one with 4 more-or-less even quarters, the bottom 25% should pay a bit less, and the top 25% a bit more, but the actual distribution is very far from that.
The bottom 50% only earn 24% of the income, so at the tax share graph is always going to be dominated by the top 50%
The government statistics for this (google “Shares of total Income Tax liability “) show that the top 1%* pay about 28% of the total income tax, but they also earn 13% of the total income.
The bottom 10% pay 0.4% of the income tax while receiving 3% of the income.
Dubious economics digression: The implied utility of “one more pound” to someone in the bottom 10% is about 16 times (28/13) / (0.4/3) greater than the utility of the same pound to someone in the top 1% – this doesn’t sound totally implausible if you consider the prices of discretional spending on things like holidays or eating out. However, it only includes income tax; VAT, fuel duty etc take up a far bigger proportion of your budget on £12k year than on £200k, even while the absolute figures are much higher for the high rollers.
All of this slightly misses the point that while someone with tens of millions may be sympathetic to a fairness argument, it may not weigh as heavily when deciding where to live, as the weight of the millions they could save by relocating. This puts a cap on the highest tax rates (it’s messy and indirect, but it’s a valid argument) – so maybe the solution to the income tax distribution and the nations finances would be to pay the bottom 10, 25, 50% a bit more income? Which I think is another way of arguing what @TI and many others have been saying all along – growth in the medium to long term is what’s needed – but I’d add that if that growth flattens income inequality a little bit so all the money doesn’t bugger off to Monaco (and maybe the share of tax paid graph looks a bit less extreme), all the better.
*For reference, the pre-tax income at 10th and 99th percentile are 12.8k and 214k, but the tax figures take the whole =1% brackets into consideration
If they seriously mess with ISAs, then I’ll consider taking the lot out and leaving the UK. My job’s here, but I’ve accumulated ~14x – 15x my gross annual income between the ISA and the SIPP, and it wouldn’t be worth my staying here just to be fleeced. From PEPs, through TESSAs, to ISAs there’s been an absolute continuity of principle that no tax relief on the way in, and no tax on the way out or in-between. If Labour break that principle now, then they will have broken every promise made by every government from 1986 to date, as well as doing something not mentioned in their manifesto or in their campaign.
@FL, nothing would please me more if the bottom 10, 25, 50% earned more, but how do you go about achieving that and still have a competetive economy?
@Delta Hedge, yes it would be a kick in the bawbag, but I would advise against knee-jerk reactions. Where you go may end up worse in more ways than one.
@Naeclue:
Re: “a kick in the bawbag”
Blimey, that takes me back!
You’ll be advising folks to stop: “bumpin yer gums” & go “awa and bile yer heid” next!
@Details Man, thank you for the interesting links. I was hoping someone might post something like this as I cannot find the document that I read saying much the same.
Regarding taxation of median earners, I would have thought that fiscal drag would be fixing this.
@Naeclue – yes, fiscal drag helps but it’s going to be a long time before the personal allowance returns to a level similar (in real terms) to pre-coalition levels. Osborne raised the personal allowance massively which took a large number of workers out of paying tax. It’s only over the past year that we’ve got back to pre-coalition levels of % adults paying IT.
The IFS have published a very interesting paper exploring the coalition/Conservative government’s record on tax:
https://ifs.org.uk/publications/governments-record-tax-2010-24
In short, the government hiked taxes on higher earners whilst reduced tax on low to median earners.
@JB (#20), @Boltt(#25):
Fig 4 in the document linked by @TDM (#74), gives the history (from 10/11) of the PA (pensioner) aka Age Related Allowance (ARA) IIRC, until its demise in 15/16.
Can anyone get any more abbreviations and/or acronyms in one, hopefully still meaningful, sentence?
There’s all this talk of possible changes to CGT, but which CGT rates? The usual 10/20 rates, or the 18/24 rates on selling investment properties? Maybe all, maybe none, maybe equalise, maybe indexed to inflation or maybe not. Rachel Reeves said herself when Hunt cut the old 28% rate on selling a rental property to 24% that government research showed it would not reduce the tax take, so there’s little point raising it now. I have a GIA with some gains and am on the fence. The main downside is any voluntary disposal now puts funds with HMRC that I then make no returns on, so unless I expect to sell in the next few years (probably not) I may as well hang on and pay more CGT later. If property CGT jumps much I would slow down my rental properties disposal plan to earn more returns to cover the higher tax.
@The Details Man “In short, the government hiked taxes on higher earners whilst reduced tax on low to median earners”.
Kind of, but this must surely depend on how you define earnings. If by earnings you count income from employment and business activities, then yes that seems plausible. But if you leave out capital gains from investments and property, then I am not so sure.
Since I stopped work most of my “earnings” have come from capital gains, yet I have paid hardly any tax on those gains. That’s because a good chunk sits in tax shelters and on the rest I have not realised the bulk of those unsheltered gains and so not paid much tax. I am sure my situation is fairly widespread amongst “high income individuals” that derive most of their income from investments and property instead of say PAYE.
Just one example, albeit extreme. The value of my GIA S&P 500 ETF has gone up about 300% in the past 10 years and I have paid no tax on this. My dividend income from the ETF, which I have paid tax on, is of the order of 20% (I have not added it up). About 320% return, taxed on 20% of it. Low and middle earners on PAYE have paid far higher rates of tax on their “income” than me.
Short of taxing unrealised gains I don’t see a way of really increasing taxes on high earners.
@Naeclue – sorry, you are right. Imprecise language on my part. I think “median employment income” would be a better way of putting it.
@naeclue, there was talk of taxing unrealised gains in the US, so I am sure it has crossed their minds. I think if that happened, holding on to an investment (or indeed making new ones) might become less attractive. At least with cash they can only tax the interest (unless they bring in a wealth tax).
Aligning CGT and IT rates sounds superficially plausible but would be a fundamental tax policy mistake. The key point to understand in this debate on optimal CGT tax rates is that there is already a parallel stealth tax on both income and on wealth in the form of inflation. Even at low rates of inflation, taxing nominal gains obliterates real returns for taxable investors, which is a recipe for strangling risk taking innovation and economic growth. Historically therefore governments around the world have come to the realization that concessionary rates or full exemptions from CGT were necessary to persuade investors, and especially non-captive foreign investors, to buy and hold government bonds or other fixed income instruments, and even more so for shareholders of inherently riskier equities.
The alternative policy of adjusting for the effects of inflation through indexation and taxing real rather than nominal returns was applied by several governments including the UK in the past, but have been progressively phased out in favour of simpler tax regimes with various exemptions or so-called “concessionary” rates of CGT.
Finally, governments may be frustrated by the fact that investors can defer the timing of asset sales and therefore payment of CGT, or even entirely avoid it on death when the even more rapacious IHT comes into effect. However, isolated attempts by various governments around the world to tax unrealized capital gains or notional income and other fictitious investment returns, are variants of wealth taxes which have faced strong pushback on both legal and political grounds.
Commenting on tech startups since that’s the field I am in. There will be little incentive to start one such startup in the UK if the CGT goes up further. Entrepreneurs and early startup employees are paid mostly in options/shares that in 9 out of 10 startups are worthless but in 1 out of 10 startups will make the entrepreneur and employees a lot of money. A typical successful startup spends 7-10 years in lean mode before an exit/IPO. If at the end of this journey the government simply takes away 45% (marginal) of the delayed earnings, the best action for an entrepreneur would be to move to the US to do a startup or stay in the UK and work for a large company, since the toil is not going to be worth it.
@Dragon (46)
Your comments regarding donating money to HMRC resonated with me.
“And as for the Patriotic Millionaires and their ilk (https://patrioticmillionaires.uk/), LOL! If they feel so strongly about paying more tax, HMRC make it dead easy to do. It’s right there on the HMRC website: https://www.gov.uk/guidance/voluntary-payments-donations-to-government”
I know a lot of people that are relatively well off but voted Labour (I didn’t vote and haven’t since 1992 (when I voted Labour). My problem is that voting Labour is like a turkey voting for Christmas and due my working class upbringing, cannot vote Conservative).
I wondered why, during the last 14 years of Conservative rule, they didn’t donate their ‘ill-gotten’ gains to the charities of their choice. After all, who would choose to donate money to the HMRC rather than supporting good causes which matter to them?
In order to keep my comment at least partially on-topic, I have a BTL flat which currently has little or no capital gain. Depending on the budget outcome, I will consider disposing of it at the next tenancy renewal to avoid accumulating a taxable gain.
Of course we wouldn’t even need to be having this conversation if the Tories hadn’t reduced National Insurance by 4% without explaining how they would fund it apart from some vague and unrealistic spending cut plans. They effectively boxed in Labour by making unfunded tax cuts (a la Liz Truss) and then making the whole election about taxes. Sunak repeated this message ad nauseum, ‘Labour will increase your taxes’, conveniently ignoring the fact the Tories were already doing just that by freezing the tax thresholds.
The TV presenters didn’t help either, I remember one of the TV debates the presenter asking ‘Yes or No, are you going to increase income tax, are you going to increase VAT, are you going to increase national insurance?’ Not, ‘Where exactly are you going to make cuts to fund the £20bn-£40bn fiscal black hole?’ which would have put more pressure on the Tories to explain their plans.
As someone on the IFS podcast said last week, it would be easy to sort out the budget shortfall simply with a small increase in income tax or national insurance, and that would be straightforward and fair across the board. Instead we’re looking at making big changes to things like CGT, inheritance tax, ISAs, pension tax relief which may have unknown consequences as some have alluded to above. It’s a bit of a joke really.
Anyway sorry rant over.
@Wephway (#82):
Re: “Of course we wouldn’t even need to be having this conversation if the Tories hadn’t reduced National Insurance by 4% without explaining how they would fund it apart from some vague and unrealistic spending cut plans.”
Given the scale of the issue, I think we would still have to be having this conversation. The book I refer to at #16 above provides IMO a good explanation.
Thanks for all the excellent and articulate contributions to this thread, far more than I can reply to individually so I’ve enjoyed stepping back and seeing what we all have to say.
Interestingly tax expert (and Monevator reader! 🙂 ) Dan Neidle has some interesting things to say about CGT changes and other wealth tax type stuff in the FT Today.
He concludes:
https://www.ft.com/content/1ed71bcb-e350-45ba-b1e1-fe9f8c3e370b
Obviously I entirely agree with that last bit, as I wrote in my piece above.
Right-wing commentators accusing Labour of joyously getting the tax boot in whilst talking Britain down are pretty frustrating — typically barely an acknowledgement that Labour has been in power for less than three months and that Brexit and other blunders by the last administration is *partly* what got us here… see Brexit-supporting Merryn S-W in Bloomberg today, for example.
Nevertheless, to some extent they are right (if partly for the wrong reasons…)
If Labour tilts us towards austerity for another five years in the state we now find ourselves in, it’ll do *nobody* any good.
By all means tax a little more progressively if needed — as I say I’d just do this by freezing thresholds, which I don’t love but we are where we are and at least it broadens the tax base — but ideally tie it in with tax code simplification (e.g. the nonsense 60% marginal rate) and think about incentives that could unlock some growth, rather than make matters worse.
@Alternator “Aligning CGT and IT rates sounds superficially plausible but would be a fundamental tax policy mistake.”
I like consistent tax policy. Having a policy where one form of return (capital gains) are given an inflationary tax break but another, such as the return on bonds, does not is inconsistent. Following the freezing of indexation relief corporation tax is now charged consistently across all forms of profit – interest, capital gains and trading profits are all taxed at 25% for companies with profits over £250k. So why do we not have consistency with personal taxation?
Now if governments want to give a tax break on capital gains to encourage particular types of investment, then that’s fine. Just don’t pretend you are doing it for reasons related to inflation.
The problem of course is not so much the principle that all returns should be consistently taxed, but the practicalities. Taxing unrealised gains would be enormously difficult and disruptive, with big gains one year requiring asset disposals to pay the tax being followed by big losses the following year.. Then there is the issue of valuations. Simple for listed securities, but much harder for other assets. Also, taxing capital gains at 45% would be counterproductive as less tax would be collected than it is at 20%.
Nevertheless, allowing unrealised gains to accumulate indefinitely also seems problematic.
I note that Norway insists on payment of tax on unrealised gains before allowing someone to lose their tax residency. That seems like a good idea.
Aligning income and CGTax could create some tax efficiency bonus. A married couple with one higher earner and one lower earner could pay the lower earners income into their SIPP, creating a 12300 capital gains allowance.
This could all be simplified if she slapped an annual tax on unrealised capital gains on owner-occupied housing. Easy-peasy.
I also recommend that IHT be charged when people turn 70: an unrealised death tax.
@dearieme (#88)
I’d be tempted to point you at #72, but I assume you are being deeply ironic!
@A1cam
I believe there’s a 10 year charge on discretionary trusts. Something along these lines doesn’t seem totally unreasonable for unrealised gains.
As mentioned elsewhere paying CGT (and other taxes) on funds leaving the uk also seems fair.
@Boltt, “I believe there’s a 10 year charge on discretionary trusts. Something along these lines doesn’t seem totally unreasonable for unrealised gains.”
UK domiciled trusts pay CGT. The 10 year charge is IHT, it is not a tax on unrealised gains.
Any tax on unrealised gains is difficult in a number of instances. For example, BTL owners cannot sell part of a property very easily in order to pay an unrealised CGT bill. The same is true of many privately held businesses. I held shares in a private business. Something like 99.9% of the value of those shares consisted of capital gain, which is not uncommon with private businesses. The hassle and cost involved with exiting was bad enough, but the thought of having to get regular valuations and finding funds to pay unrealised capital gains is horrific. Bureaucracy UK business owners could do without and definitely not pro-growth.
@Wephway: “the TV presenters didn’t help”.
It’s a more than minor scandal that the BBC pays some of its presenters hundreds of thousands of pounds each yearly from licence fee payers’ enforced contributions and they’re not even vaguely technically proficient in asking the questions that need to be asked in the way that they need asking.
We saw how Dominic Cummings was let off the hook by the appallingly repetitive, unimaginative and lame questioning over Barnard Castle in the Rose Garden interview; how miserably uninformed and useless the coverage of the Brexit referendum campaign was; and the similarly deficient treatment of the general election.
The journalistic “Fourth Estate” just isn’t up to the job. I’m not talking about bias here (although, I personally think that the press overall has a right of centre bias). Instead, I mean that they’re simply either not competent or not very good at their job.
Instead of useless, or at least inadequate, journalists, why don’t the BBC/ITV instruct a King’s Counsel or two to cross examine these politicians on their policies and programs?
I think that the result would be a lot more satisfactory for the voters trying to make up their mind, and probably overall cheaper for the broadcasters (and licence fee payers).
@TI (quoting Dan Neidle in the FT): “the main game should be growth”.:
As the mad queen Truss rapidly discovered, tax policy alone cannot drive growth, whilst ‘unfunded’ and ‘gratuitous’ tax cuts, at least when accompanied by emasculating the OBR and publicly snubbing Treasury expertise (i.e. by sacking Tom Scholar) can seriously imperil macroeconomic stability.
As per my comments above, I’m no fan of Dom Cummings and Co., but he was/is right that we need to do much more, and spend much more on, basic R&D, and to set up something like the UK version of the Advanced Research Projects Agency, which Eisenhower established in the US in 1958 in response to Sputnik.
Growth comes from productive and useful technological innovation, and that, in turn, comes from expanding the frontiers of practical knowledge through R&D.
But to be effective here we need the scaling which the UK on its own cannot achieve.
That means that we need to team up on R&D with the EU, with the US and with Canada, Australia and New Zealand.
That’s getting towards a billion people, and close to half global GDP; and both allows us to get economies of scale and shared efficiencies in carrying out the research, as well as to leverage size to get ideas into development and towards full commercialisation.
Giving taxpayers’ a tax sheltered vehicle to co-invest into this process could be a win-win for the State and the taxpayer. Like a massive State backstopped tax advantaged VC fund. EU and UK State aid rules would need to be rewritten – but where’s there’s international will and agreement then there’s also a way.
[Errata & apologies for the typos / surplus apostrophes in that last paragraph: typing on the move. Should have said “taxpayers a tax sheltered” and “where there’s”]
The idea of exempting inflationary gains from CGT is superficially attractive, but it is difficult to justify it for shares or property when the same surely applies to interest on cash or anything else. And should someone get a tax rebate if their salary doesn’t keep pace with inflation? It would be a minefield.
@DeltaHedge I am not sure why you are criticising BBC salaries when the Dominic Cummings interview also involved journalists from other TV channels (ITN, Channel 4, Sky News etc) and newspapers. Just one question each I think. Do you know that the BBC salaries were higher than the going rate for that job? To be honest I recall (though it is a while ago now) that they were all pretty critical – though they were careful not to be so critical as to be excluded from subsequent press conferences, which must have been a constant risk under the Johnson regime. There are however very very few journalists who are economically literate.
@Delta Hedge #92
I accept a putative charge that I am expressing an old git’s view, but has it ever occurred to you that we may not be able to get from here to there?
When I was in primary school they rolled in a black and white TV to show Armstrong et al on the moon. I believed in progress like everybody else, perhaps I had a little part in adding to it over an engineering career. This story has been swapped for global warming and basically managed decline if any intelligent observer applies a bit of mind to the parameters of the situation, and no AI won’t solve it in general largely through a lack of power though I am sure it will address niche problems.
We don’t have the spare resources any more to throw at your utopian dream. Oswald Spengler wrote down how the fire fails. The torch is passed on to others over time, but more of the same ain’t gonna get us from here to there. Sic transit gloria mundi and all that.
“The idea of exempting inflationary gains from CGT is superficially attractive, … It would be a minefield.”
But it worked when we had it before. You could just copy the rules applied at its last introduction.
Anyway, anyway: this discussion is largely about short term stuff. Our long term ruin is assured unless we stop the humungously expensive defined benefit pensions of state employees. I do hope it’s not necessary that we swipe their accrued benefits but accrual of future benefits must stop.
@Jonathan B: They’re all overpaid for the skill set and their demonstrated level of competency, but only the BBC’s are paid through a licence fee.
Sky and ITV were no better than the BBC with dealing with Dom Cummings and the situational comedy act formerly known as Boris the Clown (who could forget the aptly named “Operation Save Big Dog”, after Partygate broke).
You make very fair points about the journalists only getting one question each, and about the Johnson government’s attempt to intimidate the press and impede scrutiny by excluding access and coverage.
I did, however, think that the journalists at the Dom C press conference in 2020 could still (even though they were from rival outfits) at least have coordinated beforehand to the extent of checking that they weren’t all basically asking the same question in various different ways.
@ermine: maybe it’s being delusional on my part, but since the enlightenment and then the scientific and industrial revolutions we Sapiens have managed to extract ourselves from every set of problems which we’ve faced (from Malthusian overstretch through to bootstrapping ourselves out of a world of 90% eking out an existence in absolute poverty, and largely eliminating pestilence) by the application of our minds.
I’m not talking about mindless optimism here, but rather of mindful hopefulness and having the will to keep trying.
Just as, over time, the global stock market has always has gone up (e.g. whether the S&P 500 since 1957, the S&P 90 from 1926 to 1957, or US stocks more generically since 1802, as shown by Jeremy Siegel), despite wars and civil wars, disasters and much bungling; so too I hope that it’s not unreasonable to expect the same for human progress.
It won’t be an easy ride for sure, but we don’t have the choice but to try; and, if we don’t try, then we can’t succeed.
@dearieme #96: “Our long term ruin is assured unless we stop the humungously expensive defined benefit pensions of state employees”: The public sector DB pensions schemes’ cash deficit (employee and employer contributions less payments) is currently running at £2.4 bn p.a., <0.1% of GDP. Not so humungus. I don't see Labour, with around 300 more seats than the Tories, realistically reducing any DB scheme contractual entitlements.
DB pensions are a bit of a red herring and always an easy anti-state discussion. I worked for a few years in a public sector organisation decades ago now and even then the final salary scheme was closed before I joined and the new scheme was DB career average, whilst directors are, even today, not even getting paid much more than £70k/year. I wouldn’t have an issue with forced conversion of DB to some sort of fixed pot at some sensible rate but many DB schemes now are not final salary schemes, and haven’t been for decades. People in the public sector with DB career average schemes will be lucky to retire on anything significant given how low (relative to private sector) pay is in most roles, and the fact very few people get to the top levels early in their careers. Further, the schemes aren’t all rosey, often with absolutely zero flexibility on contribution rate (as in my case) as it was dependent on your salary (starting at 7% if I remember correctly) and with almost no flexibility to access them earlier than state pension age, and no “pot” to pass on if you die. Outside of a few well known pension schemes that few people ever can access, the modern DB schemes are nowhere near as generous as people would like the wider public to believe.
I am less interested in the tax side of the equation than I probably should be. I personally think taxing income harder but with more rates, and sorting all the cliff edges due to stupid allowances and interactions of such, should have been step one, and simultaneously implement high taxes on large estates at death. Taxing income can only ever be fair when death taxes are such that wealth can only ever be earned and not simply aquired through being passed down. Further, the income side of the tax equation cares little about flight of those with most wealth today as there is usually someone prepared to apply for their bosses job (and subsequently paying the same tax as his/her boss that fled). Contrary to popular opinion, the directors and CEOs of most organisations are replaceable.
But, alas, we ruled out increasing the “working people taxes”. I will be interested to see what transpires in the budget.
@ DH #98
The current cash flow difference between receipts and payments is mostly irrelevant. The issues is how large are they reserves needed to fund the future payments on past service. And what is the trajectory is future contribution is permitted.
Private pension schemes have reviews every 3 years to check funding rates are adequate taking into account the long term future lens. There’s many a bankrupt pension scheme with no current cash flow problems – think Ponzi scheme.
Final salary schemes may be mostly gone, but DB schemes are still a plenty in the public sector. The career average scheme for NHS is just that with past service inflated at CPI + 1.5% pa. Jesus wept that means for humdrum career paths this is probably better than a final salary scheme.
These schemes have to go before they bring down the finances of the whole country. The demographics don’t have much flexibility with unfunded schemes – much like the state pension.
I have a big chunk of gains in my GIA (all vanguard lifestrategy) that I’m worried about. If it wasn’t for Oct30 I would be holding them for the long term but I hate the idea of a big future tax bill and I’m not going abroad to avoid it.
So at what point is increased tax offset by what you gain compounding the deferred gains?
I’m struggling to visually simulate the various outcomes.
Question for the group – if you had a crystal ball, and had a massive unrealised liquid gain, then at what rates would you hold or sell and rebuy (similar)? What would you do at 25%? 30%? 35%? 40%? 50%? (your opinion not advice of course)?
@Boltt #100: I don’t dispute that what you outline could happen, but we’re dealing here with projections (read guessing) about a future which had yet to happen and about which we know nothing with certainty.
Maybe life expectancy won’t increase as much as previously assumed (it’s gone down in recent years in the US). Maybe the economy will resume its 1950 to 2007 approximate 1.5% to 2% p.a. (per hour worked) productivity gain. Or maybe your right. But we don’t know.
The accounting figures are based on treating the private sector schemes as analogous to the public sector ones. But they’re not.
The public sector schemes are backed by the State’s power to tax and to create money out of thin air. These options are not available to the private sector schemes.
Maybe that’s a bad thing. Maybe it’s a good thing. Maybe it’s neither good nor bad but just a brute fact.
At the moment though the only known fact is that the public sector pension schemes’ deficit currently is £2.4 bn p.a., or about 0.1% of GDP.
@Lurker #101
> had a massive unrealised liquid gain, then at what rates would you hold or sell and rebuy (similar)?
If you are happy with the income from that gain, then I would take a look at the chart for VGLS100 and observe this is pretty much at an all-time high, and think of the drop in capital value in a recession as an opportunity to perhaps sell and rebuy. Perhaps do the latter in your ISA 😉
There probably will still be some tax-free CGT allowance, so if you are unhappy with the income then I suppose you can whittle it down taking a 3k gain each year.
Although I’m temperamentally different from Naeclue #35 in very many investing ways, I am adopting his position of doing nothing with the gain. And most of my gains are with gold, I don’t even have an income to compensate for it. That’s largely because I flushed half my GIA VWRL into the ISA as Jezza was chipping away, taking the CG and the income into the sheltered a/c.
You should be able to compute the sell and rebuy difference, that is assuming you are able to do that after the announcement. Watch for: the cost of the turn, the fact that your capital gain added to your existing income takes you closer to higher tax thresholds that also affect CGT rates you pay that may kibosh any advantages of getting in ahead of any changes, and of course the 30 day CGT rule for buying and selling the same fund, though I suppose you could finesse a VGLS60 into some combination of VGLS100 and VGLS20
@Lurker, @ermine’s point about not ending up in a higher tax bracket by realising large gains is key. I would suggest a spreadsheet so you can plan around the various possible scenarios.
As to what I would do… I read somewhere that some wealth managers are advising clients to sit tight if they don’t need the money. CGT rates have tended to fluctuate, and if the expected revenues don’t materialise, they could well fall again in 5-10 years’ time, or possibly sooner. Releasing small gains annually, offsetting losses and gains up to one’s current tax threshold, and living off the income from dividends is a reasonable way forward IMO. Currently dividend tax is lower than IT. It could well be aligned with IT, but it’s unlikely to end up higher, I would think.
@DH
Not all estimates or projections are guesses. Tomorrow’s weather in a estimate, next year’s is a guess.
When there are multiple possibilities they are not equally likely.
The shape of the future age profile of the UK is pretty well known for a few decades – for it to be otherwise would take some unlikely events. Which are possible, but unlikely – we need to build public finances on likely outcomes
There is a known liability for future public pensions and state pensions. The 20-21 figure I found was £2.6t for the public sector pension only, this will come down as the view on future interest rates have changed.
The current positive cash flow is tiny compared to the liability, that’s why it’s not relevant.
Printing money and over taxing workers is a dangerous game, it doesn’t usually end well or with predictable results.
Whole life insurance is an interesting case study – a new insurance company is awash with income and positive cash flows for decades, but as the portfolio matures cash flows balance. And is new business flows recede then cashflows are massively negative- this is why regulators insist on reserves and regular reserve reviews to derisk the temptation to release all the early cash flows as “easy distributable profit”.
The long term view isn’t a guess, ask an Actuary. Although their motto “certainty out of uncertainty” seems a lot like over selling.
@Boltt “The career average scheme for NHS is just that with past service inflated at CPI + 1.5% pa. Jesus wept that means for humdrum career paths this is probably better than a final salary scheme.”
I would be pretty pissed off if my DC pension pot only grew at CPI+1.5%.
The CPI+1.5% only applies to members who stay in service as well. Should they leave service for more than 5 years they only get CPI increases.
My daughter is a member of the NHS career average scheme and when I looked at it I cannot say I was overly impressed by its generosity, despite all the complaints from the right wing media, but when making comparisons with DC pensions it all depends heavily on assumed real growth rates on investments. One thing that was clear is that the pension years accrued towards retirement were likely to be worth far more than those accrued in the early years, so working in private medicine and joining the NHS later in your career might be a good strategy. Except you would of course probably have to take a substantial pay cut if you did that.
@Lurker, I cannot add much more that StellaR and Ermine have already said. You have to play around with likely scenarios and projections that relate to your particular circumstances. When might you need the money? Will you be able to take gains at the lower rate when you do need the money?
If I realised gains now, above the £3k allowance, I would have to pay 20% on those gains, but I can foresee a future time when I would likely be taking gains at the lower 10% rate, so even if that lower rate doubled I would likely still be better off leaving it.
FWIW I cannot see the top rate going above 30% as the HMRC work, discussed earlier, makes higher rates counterproductive.
@naeclue
I’d expect more than CPI +1.5% on my investments too.
Final salary schemes are very generous for those with strong salary progression (and service near retirement, as you said). I managed 5.5x my starting salary over 12 years so lucked out.
My daughters’ (nurse/radiographer) salary progress has been much more pedestrian so a guarantee of cpi+1.5% seems pretty good. I’m not sure their wages can match that level of increase over the last 12ish years.
Also the DB employer contributions tend to be much larger than the match% for DC schemes.
Many FS scheme have CPI/RPI +2.5% cap, compared to these CPI + 1.5% (uncapped) doesn’t seem that bad.
I’m grateful for their pension, although they’re struggling to see the value and complain about the 9% cost.
Ps perhaps train driving would be a good option for part time work 50-60 for max pension benefit
Just on the CARE DB pension schemes as well for those that don’t know, they are not an average of your salary, they also have a normal divisor of the career average, like (/60). So someone doing 3 years at 24k, 25k, 26k in a public sector role would be (24+25+26)/60 per year once they hit state pension age, with the 24k, 25k, 26k uplifted each year by the agreed rate (in my case, no +X). Yes, these are good pensions especially for people aiming for FIRE and planning for this not long after leaving education, as it massively derisks a large part of later year calculations, but the downsides are clear – FIRE requires significant wealth to be accrued, even if that is ‘just’ 20k a year at a 4% withdrawal rate (a nice well understood situation that many people have serious problems with, but we can go with it). You are not going to get to FIRE in a moderate time period on a graduate entry role in your 20’s with a career average DB pension scheme, short of extreme frugality, especially when to join that scheme it immediately is likely to be ~10% minimum contribution of a starting salary that will be at best, in specialist roles, probably about £35k, and you would be limiting your salary progression to within the pay band while you stay in public sector.
Think about it, joining the public sector is basically capping your salary at about 40-60k depending on your specialism, assuming maximum career progression and promotion, unless you make head of service or director level. Yeah a handful of well known roles might be exceptions, but if you think you can just walk into those roles and have an easy life, my thoughts are – go try do them.
I would guess most people reading this blog would not be prepared to get up out of bed in the morning to do their equivalent job on public sector equivalent wages. That is not me being offensive or cheeky, it is simply me stating that a near entry level role in a common but skilled specialism like retail banking is better paid and has better progression salary wise than all but head of service and above positions in public sector (excluding the rare exceptions, which does include the likes of politics which largely allows unskilled, non graduates etc to take up – these are not the norm in public sector).
My only real point here is that the true golden pensions are long gone, and as those on them naturally, ahem, pass on, the good story ‘public sector pension’ debate will go away. I would guess it wouldn’t even be a good story today if politicians didn’t have them.
@Boltt @Naeclue as I’m sure you realise, comparing DB and DC pensions is like comparing apples and pears.
With public sector DB pensions, annual contributions effectively purchase a pre-determined ‘slice’ of career average earnings, irrespective of investment returns. The annual uprating simply ensures that slice maintains its value ‘in today’s money’.
The end product is a lifelong, index linked annuity, usually with the added benefit of survivor’s pension, plus various add-ons such as death-in-service benefit etc, and the option to exchange some years’ pension for a lump sum.
If you contribute long enough to accumulate 100% of ‘slices’, you get your full CARE salary, uprated in line with some measure of inflation, each year for the duration of your retirement.
No investment risk, no sequence of returns risk, no danger of ever running out of money.
@MartinT #110
> If you contribute long enough to accumulate 100% of ‘slices’, you get your full CARE salary
Are you absolutely dead certain sure about that? Does not the divisor of 60 reduce it somewhat? Think about it, working for sixty years implies a retirement age of 80-ish. The normal working life of 30-40 years implies an annuity of about 50% to 67% of that CARE salary
Some DB pension schemes are still pretty good. At least, I consider mine as pretty good one and I joined public sector just a few years ago. It is final salary pension rather than average salary. Retirement age is fixed at 65yo and it cannot change because state pension age suddenly went up to 70yo (fair chance of this happening in UK considering complacency level in society – it would not fly in France). It is also adjusted by inflation. The formula is basically years worked x your final annual salary x 1/80
But I agree these generous DB schemes are disappearing. For example at my workplace new joiners have their DB pension age set at the same level as state pension age. So if state pension age increases so is their DB pension age.
As for the taxes. It’s complicated, it always was and always will be. My way of avoiding taxes, although not for everybody, is simple yet difficult: keep your spending habits low and don’t accumulate to much.
We can’t remove the accrued rights, as @dearieme #96 suggests, as these are protected property rights under Article 1, Protocol 1 of the European Convention of Human Rights.
We didn’t leave the Convention over the Rwanda scheme, and only one country (Greece in 1970) has ever done so before, and that was only when, under the ‘dictatorship of the colonels’ from 1967-74, it was threatened (by the Council of Europe) with expulsion for human rights abuses. Once democracy was restored in 1974, it rejoined. Russia, however, was expelled in 2022, after its invasion of Ukraine.
To date only the Vatican City, Russia and Belarus are not members of the Convention. I am sure that we would not want the UK joining that short list.
We could try and move existing DB scheme members to a DC scheme for the future (protecting, when doing so, their accrued rights to date under the DB schemes).
In practice, however, this is likely to be problematic, as Osborne and Cameron (and their successors) discovered when, in April 2015, they tried to end existing DB FSS and replace them, going forward, with (a less generous) DB CARES.
They were taken to court and lost.
In 2019 the Government was refused permission to appeal by the UK Supreme Court from the decision of the Court of Appeal (the McCloud case). This, in effect, reinstated the former DB FSS for the period April 2015 to April 2022.
It would be possible, however, to offer new entrants to the public sector a DC rather than a DB scheme. That would cap the liability for the DB schemes at existing and former members. There would be no new liabilities.
Re @Boltt #105: On the projected cost of DB: I am quite sceptical, where human affairs are concerned, of confident projections made for many decades ahead.
Who foresaw in the 1980s the secular decline in interest rates, the possibility of a near Great Depression event in 2008, or the peace dividend after 1989 etc?
Whilst ‘demography is destiny’, which destiny is it exactly?
Paul Ehrlich and the Club of Rome confidently projected the fertility rates and population growth of the 1960s forwards; foreseeing, with great and misplaced confidence, a world on an unsustainable trajectory towards mass famines, the collapse of resources and global penury.
They were wrong (to date). Now the concern is declining fertility rates and population shrinkage.
I’d venture that it’s almost certain that one or more assumptions going into the £2.6 tn figure will turn out to be wrong.
Let’s not place too much faith in what can fairly be described as made up numbers, even when they’re made up in good faith.
@ermine #111 the LGPS scheme my daughter is in has a divisor of 49 – just about achievable with a pension age of 68 and rising. If she stays the course, she will be at 80% of CARE, plus a very beneficial transfer in of funds from a previous DC pension.
Can somebody please clearly clarify the scope of the NHS schemes CPI +1.5% escalator?
For example:
a) are there any caps and/or collars present;
b) does it apply to deferred part(s) of the scheme (e.g. the tranche of service covered by FSS) or does that tranche have separate arrangement(s)?
c) with respect to the current (CARES) scheme:
(c1) for active/retired members: does it only apply to revaluation (increase before the pension comes into payment), or
(c2) indexation (increases once a pension is being paid),
(c3) or both,
(c4) or something else.
(c5) for deferred members: @Naeclues comment #106 hints that it drops to CPI for deferred members but only some 5 year after leaving the scheme.
The reason I ask is these subtleties are oftentimes quite important, especially in the presence of frozen allowances, different inflation scenarios (inc. rampant inflation), etc! And, from personal experience, the significance of them can be easily overlooked.
Thanks.
@Boltt, “Also the DB employer contributions tend to be much larger than the match% for DC schemes.”
Absolutely! That is the key difference between most public sector DB schemes and private sector DC schemes. Across the whole NHS the employer contribution is about 10% of pay, tiered though so that the individual rate depends on pay, the employer’s contribution about 23%. Precisely what this 23% represents, whether it is actually paid somewhere, etc. is not entirely clear to me as the NHS scheme in unfunded, but when I worked it out for my daughter last year the figure seemed about right even if only notional. 25% +/- 5%, depending on various assumptions seems to be in the right ballpark.
Anyone comparing jobs between the private and public sector really does need to take pensions into account. In my former company we had no DB scheme and only paid the statutory minimum to DC schemes, but offered the option of salary sacrifice up to their annual allowance. An option most took advantage of, but they were a well paid and financially literate lot.
DB schemes of course are not worth as much as they used to be following the reset in gilt yields. Index linked pension annuities now cost around 4.5% for 65 year olds, which is better than the widely accepted 4% SWR. Something not lost on my daughter when I explained it to her and something that did nothing to diffuse her anger over her pay!
#114 just checked the transfer. She was offered an annual pension of £2910, index linked in perpetuity, to be drawn at state pension age, in return for a £21.3k DC pot. I make that a ~13.6% return – more than 3.5x the widely-discredited 4% SWR rule.
Either the LGPS employs investment managers who make Warren Buffet look like a clown, or the taxpayer has a massive unfunded liability ahead…
@Naeclue #116 there have been a number of suggestions of increased public sector pay in return for reduced pension benefits. Apparently the unions refuse to discuss.
@Naeclue (#116):
Re: “DB schemes of course are not worth as much as they used to be”
Being picky: arguably (in terms of benefits) they are worth exactly the same as they were before. What I think you are getting at is CETV’s (assuming they are available and IIRC you cannot ‘trade in’ a public sector pension anyway) are much lower and/or it is cheaper now to buy the equivalent pension benefits from an insurer. All of this [gilt driven valuation] could change again, but the DB benefits will still stay the same.
Martin T, “As I’m sure you realise, comparing DB and DC pensions is like comparing apples and pears.”
Yes and no. Yes, with DB CARE schemes annuity income streams are accumulated and revalued each year according to inflation, or inflation + a spread. With DC schemes a pension pot is accumulated. Annuity streams can be converted to cash pots and vice versa, so comparisons can be made. Assumptions are of course required, in particular the real return on a DC pension pot, but that does not mean comparison is impossible.
@Al Cam
Indeed. To put another way, you need a lot less money in a DC pot to buy an annuity of a given size than you did a few years ago. So these “Gold Plated, Unaffordable” public sector schemes are less unaffordable than they use to be. 😉
@Naeclue I agree it’s possible to put a value on a DB pension in terms of the size of pot required to produce an equivalent annuity, and I think that would be a very instructive lesson for many DB scheme members who complain about low pay today. They will be rolling in jam tomorrow compared with their DC peers!
Nonetheless, in the end it is contrasting a guaranteed, index linked annuity with an investment which is subject to the vagaries of the economy, charges, investment and crystallisation decisions, etc etc. Recent years have shown just how unpredictable these factors can be.
@Al Cam, “Can somebody please clearly clarify the scope of the NHS schemes CPI +1.5% escalator?”
There is more than 1 scheme, but the latest scheme, the one my daughter is in, is the 2015 scheme, they accumulate 1/54 of their pensionable salary per year. So if they earn £54k in a year, their pension for that year is £1k. The following year the pension is uprated by CPI+1.5%. No caps/collars, it could go down with deflation.
If you leave service and join within 5 years what you have previously accumulated continues to be uprated at CPI+1.5%, but if you join after a gap of more than 5 years it rises at CPI. After retirement the pension is increased each year by CPI.
They can accumulate up to age 75, so theoretically it is possible for someone to retire on 100% CARE, or more!
@Martin T, “They will be rolling in jam tomorrow compared with their DC peers!”
That depends on the amount contributed to the DC scheme and future investment returns. If similar amounts are contributed the DC scheme could easily outpace the DB scheme and I know many people with DB schemes who certainly are not “rolling in jam”.
@a1cam
Here’s some scheme documentation for the 2015 and 2008 schemes, enjoy:
https://www.nhsbsa.nhs.uk/sites/default/files/2024-05/2015%20Members%20Guide%20%28V13%29%2005.2024.pdf
https://www.nhsbsa.nhs.uk/sites/default/files/2024-05/1995-2008%20Members%20Guide%20%28V25%29%2005.2024.pdf
@Martin T
“She was offered an annual pension of £2910, index linked in perpetuity, to be drawn at state pension age, in return for a £21.3k DC pot. I make that a ~13.6% return – more than 3.5x the widely-discredited 4% SWR rule.”
There is a crucial factor missing there – how many years to go before state pension age? I hope she did not make the decision assuming she would be paid the pension from tomorrow, as you seem to be indicating.
@Naeclue How much you contribute is crucial. If you include employer’s contributions at 23%, as you cite above, and someone who knows what they are doing investment-wise, the DC option may win out. If you take the begrudged 3% auto enrolment employer’s requirement into NEST, or similar, which many equivalent private sector workers receive, unlikely.
In my daughter’s case, a 13.6% annual pension, uprated each year by inflation, and guaranteed for life, was always going to beat the Scottish Widows group personal pension default investment option, however long she had till retirement.
I can’t think of a good reason for capital gains tax to be less than income tax. It is essentially a source of income, and the people who pay it tend to be richer than the average, so having CGT less is regressive.
The only reason it bothers me is the fact it makes managing investments more difficult, and potentially encourages inefficiency (or paying for more expensive arrangements bought from the finance industry like all in one funds).
I have an easy solution. A new tax-advantaged account with no limit on deposits and no time limit to withdrawal. Tax deferred until withdrawal, at which time all gains are taxed as income
It is interesting that cash, bonds, and other largely fixed return assets are viewed as simply a diversification tool in accumulation to be used reluctantly to smooth out volatility and reduce risk of wipe out losses, and the advice is to go for growth with reasonable equities allocations. When discussing pensions, a scheme where the upside is ZERO (ie your scheme is locked to a simple inflationary measure regardless of what happens in markets, no chance of above average returns), it suddenly becomes hugely desirable to many people.
We have seen from above a varying number of different accrual rates from 1/49th to 1/80th, and interestingly the 1/80th shows even the final salary person will not be retiring on their final salary unless they worked 80 years. I would be shocked if many final salary pensions are open to new members, and if you draw out a hypothetical annual income sequence on a bit of paper of someone who starts at 21, starts on a normal salary (say 30k for a skilled technical graduate) and does not make head of service level (so capped at sbout 50-60k), and works for 40 years to 61 (not exactly FIRE age…) and work out their hypothetical pension from DB CARE under the various accrual rates, you will see it is nothing amazing – you wouldn’t say no to it, but look at what salary range they have lived with and time they have had to work. The main take away though, even if you think it is great, is they have little chance to retire young – there are people on this site worrying about tax optimising strategies for 200k+ salaries and much, much, more. Complaining about DB is fair when looking at total costs to the state, but few people doing well and with money to invest would trade their situation with the public sector worker who will rarely even be paying the 40%+ tax rates in their careers due to middling earnings.
I was glad when I left public sector and was in a salary sacrifice DC scheme, simply because it could be accessed 10 years earlier than state pension age, and my salary was much higher for almost half the responsibilities, with many more management levels above me. I couldn’t believe what I was getting paid for my level of responsibility.
@Random Coder as you say, many of the strategies (along with dynamic SWRs, guardrails etc) are designed to protect against risks (investment, SRR, longevity) which simply don’t pertain with a DB pension. I guess it’s a question of how much that risk-free status is worth against the potential loss of upside.
The forensic interest Monevator readers take in these things are, of course, the exception, not the norm. I run the office for a small business offering a NEST AE pension at minimum contribution levels. In 7 years no one has ever asked a single question about the scheme!
@Naeclue (#123):
Thank you, interesting.
FWIW, it looks like quite a nice CARE scheme to my eyes.
I guess they are trying to accommodate career gaps with the [up to] five years thing? About this: do you happen to know if the revaluation immediately on leaving drops to CPI and is re-instated (and backdated across the gap too?) at CPI + 1.5% if you re-join within five years or does it only drop down to vanilla CPI after 5 years, or …. Which is an admittedly convoluted way of saying: there are many ways this gap thing could be implemented, and, as is usual with DB scheme, these fine details almost certainly matter too.
Lastly, do you know if there a limit to how many times the gap thing can be exercised?
Thanks again.
@Naeclue:
A lot of my Q’s at #131 are answered by the docs linked by Boltt, which only appeared after I raised my Q’s – Boltts post (#125) was presumably delayed as it contains more than link.
I have only skimmed the linked docs – as they are rather lengthy. But my impression is the scheme is even more favourable than I had gleaned from your summary.
Having said that, the 2015 scheme document raises some other Q’s that you may be able to help with, as follows:
a) the document repeatedly refers to revaluation being: “Treasury Order plus 1.5%”. Do you happen to know which Treasury Order (TO). I ask as some TO’s are cumulative but with capped CPI!
b) the document also refers to deferred revaluation being “by Pensions Increase”. If this means uncapped CPI, in principle (and depending on the TO used for active revaluation) deferred revaluation could, in some circumstances, be more generous [than active revaluation].
As usual with DB schemes the devil is in the details!
Sorry, I am late to this discussion. Yes, I have been trying to prepare for a tax grab or perhaps more accurately trying to cope with the existing tax grabs. So that has involved swapping yielding assets into ISA cover (and matching amounts of low yield assets into non-ISA accounts) to try to stay somewhere close to the (now ridiculously low) dividend and savings interest allowances. I also bought low coupon gilts where the yield comes from capital gain (currently untaxed if you hold individual gilts) and not from interest. I have also used the (now truly miserably low) capital gains allowance to realise what I can before the budget. Lastly, although retired, I made pension contributions using the small permitted allowance to reduce taxable income. All the above are well-recognised routes to tax mitigation.
Overall, I suspect I am not alone in feeling increasingly resentful that government is choosing to go at the small investor rather than doing the heavy lifting involved in going for the super rich (which I define as a person with over £10 million pounds of wealth).
@Hospitaller (133)
I’m also retired and like yourself continued to make the permitted £2880 (£3600 gross) annual contribution to my SIPP. I have recently come to regard this as a mistake in my particular situation and I shall not be contributing this year. High interest rates on unsheltered savings together with inflation-linked increases to state and DB pensions have brought me perilously close to the frozen HR tax threshold, such that my SIPP is close to becoming what Al Cam describes as a hostage. I.e. income can only be taken at HR even though much of the funding received only BR relief. This was a situation I never anticipated until quite recently.
A further consideration that ermine has detailed on his blog is the differences in tax treatment. Pension contributions receive relief on the way in and are taxed on the way out. So far so good if the withdrawal can be done at the same rate or lower rate than the contribution. In addition there is 25% tax free, so a clear win for the pension if we only consider the principal invested. However, dividends and capital gains within the pension can only be accessed as income at your marginal income tax rate (with the possibility of 25% being tax-free with UFPLS if the PCLS was not accessed earlier with flexible drawdown).
In contrast, outside a pension the same funds could generate dividends at currently only 8.75% tax and capital gains at 10% if a BR taxpayer, provided of course that the additional dividends and/or capital gains do not of themselves tip you over the HRT threshold.
@ Delta (#52)
Why are the Tories not doing better in Scotland? Good question. It’s a bit like asking why the country which gave the world Adam Smith and many of the inventions the modern world takes for granted has descended into a slough of socialist despair.
My own two cents, for what it’s worth, is that it is down to a variety of factors:
1. Number of people employed in the public sector – almost 1 in 4. See here: https://www.gov.scot/publications/public-sector-employment-in-scotland-statistics-for-1st-quarter-2024/pages/public-and-private-sector-employment-in-scotland/
1 in 4 is a lot of people, but that “overall” figure masks a lot of regional variance. In some of the poorer “central belt” Council areas in Scotland, its more like about 50% or more who work in the public sector. Given that, left wing parties have an in-built 25% secure voting base because, well, you know, those “Eeevul Toaries” are going to cut your benefits and fire loads of “hard working public sector employees” if they ever get into power.
2. All those civil servants (sic!) are expensive: https://www.heraldscotland.com/news/23709895.cost-scotlands-growing-army-civil-servants-soars-600m/
3. Anti-English bigotry probably plays a part, in some areas of Scotland at least – Glasgow for example, with it’s large catholic community. Tends to result in a “yes, we know this is a good idea, but we’re not going to follow it because it’s an English idea!” mentality. And the Tories are, of course, the ultimate “English Villain” !
4. There’s probably an element of “stockholm syndrome” going on too – see e.g. Gizzard @ #82 for a perfect illustration. “I can’t vote Tory because of my working class background, but I know that voting Labour is a turkey/Christmas scenario”.
@Gizzard – I’d be interested to know if “can’t vote Tory” is specific to the Tories / Conservative and Unionist Party, or to all “right of centre” parties?
5. Politics in Scotland is *very* tribal. Parties tend to be in power for a long time, and then get booted out in favour of the next “in thing”. Scotland was basically solid Tory for the most part until about 1950, then it was solidly Labour until about 2007, and it’s been solidly SNP since then. Basically, once a party gets into power, they can pretty much behave as they want for ages, until finally, eventually (very eventually sometimes) the voters finally wake up long enough to be appalled at the political cock-ups and issue the government du jour with its P45.
Amusingly, despite the rhetoric, Scotland has, since 1950s or so, pretty much had the politicians (and, since devolution) the government it wanted – Labour and/or left wing (with a brief interlude under the pro-business Alex Salmond). Has decades of left wing politics improved the lot of your average Scot? No. See here: https://www.spectator.co.uk/article/nicola-sturgeons-legacy-in-six-graphs/
This is obviously focussed on time under the SNP, but it’s not like this wasn’t already the direction of travel previously in Scotland.
Indeed, Nicola Sturgeon’s own Glasgow constituency has the lowest male life expectancy: https://www.scottishdailyexpress.co.uk/lifestyle/health/scotlands-worst-areas-life-expectancy-28057937
7. The Scottish Tories just don’t have enough “fire in their bellies”. Bit like the mob down south. If you listened to / read the left of centre press, blogs etc, you’d be forgiven for thinking that the Tories are the party of red in tooth and claw, devil take the hindmost, smallest of small state capitalists, determined to slash taxes and public spending to the bone (and, ideally, into the marrow below the bone). The reality, certainly since 2010, has been almost the exact opposite. Ever increasing size of government / state / public borrowing / taxes etc. For some reason, they seem to be ashamed of what used to deliver them election victories – capitalism (note: not corporatism or cronyism), fiscal prudence, keeping debt under control, personal responsibility, etc. They seem to think that to be electable, they need to drift ever further to the left, without seeming to realise that if people are left of centre inclined politically, they’ll just vote Labour. They don’t need a “socialist lite” Tory Party. Amusingly, for a socially conservative and in many ways still chauvanist country like Scotland, it was interesting to see that the most successful Tory leader in recent times “oop north” was Ruth (now Baroness) Davidson – a lesbian.
8. The press in Scotland is pretty supine – they’ve not held the government (SNP particularly) to account much, if at all. Some of this may be fear of doing what journalists should due to things like e.g. the Hate Crime Act – an abomination of legislation which is actually designed to muzzle free speech, the right to criticise and the right to hold politicians and quangocrats to account. There’s no parliamentary privilege in the Scottish Parliament, so you can’t have mavericks like David Davis in the Scottish parliament revealing things which are awkward to the ruling party without fear of being sued.
9. Politics in Scotland is pretty incestuous and frankly, it’s hard to avoid the conclusion that it is also very corrupt. The extent to which the executive, the civil service, the judiciary and the police were all in bed with each other came (finally) to light during the Alex Salmond trial.
10. Focus on public sector and not on private sector job creation leads to some interesting facts (it’s hard to find exact data about who pays what tax in Scotland due to the relentless focus on “equality” but some figures can be teased out:
See table 1 in this link https://www.gov.scot/publications/scottish-income-tax-distributional-analysis-2022-2023/ which says that 75% of Scottish income tax payers have an annual income of less than £39,100. Chart 1 shows only 10% of Scottish Taxpayers pay “higher rate” tax (now 42% in Scotland) and less than 1% pay the top rate (currently 48%).
This BBC article here https://www.bbc.co.uk/news/uk-scotland-scotland-politics-63988944 gives the numbers of taxpayers in those brackets as 500,000 for the higher rate, and 33,000 in the top rate. The link above estimates there are about 2.7million income tax payers in Scotland.
If you look here https://www.gov.scot/publications/scottish-income-tax-distributional-analysis-2022-2023/ in Chart 5, it seems to be saying that collectively, male and female higher and top rate taxpayers are paying 61% of all income tax in Scotland.
What this means of course is that raising tax rates for higher and top rate taxpayers is (for the moment) only hitting slightly less than (collectively) 1 in 5 workers in Scotland. This makes it easy for left wing politicians to “play to the gallery”, because those who are adversely affected are far outnumbered by those who likely think “they’re all a bunch of rich Toooaaries who deserve to be taxed to death”.
The problem for Scotland though is that it is relying on less than 20% of taxpayers for over 60% of income tax receipts. Those higher and top rate payers are more likely to be those who can leave. Anecdotally, that’s already happening.
Which may be why something entirely predictable is happening – thresholds are being frozen and higher rates of tax are biting at much lower levels than in England. A few more years of pay inflation and there’s a real risk of “basic rate” tax in Scotland being 42%.
It’s only once things reach that parlous state of affairs that a right of centre party in Scotland is likely to get a look in. I wonder who the Scottish Javier Milei will be? 🙂
I’ve come late to this thread but must say it’s been fascinating reading the comments.
I did wonder about people’s thoughts on reforming council tax/rates. Wephay said “ I quite like the idea of replacing council tax with a 0.5% house value tax. Not a wealth tax or a land value tax per se but a lot fairer than our current bizarre and extremely regressive system. If Labour are going to do something bold then that would be it, and now is the time to be bold rather than tinkering around the edges.”
The personal impact on me would be about a 70% increase in my bill, but that my fault for living in a biggish house in an expensive area. What worries me a bit more is how the whole system would work. If the same rate applies nationwide then London boroughs for example with lots of expensive properties would be collecting much more than they need. That implies that the funds even if collected locally as at present would have to be paid into central funds and then redistributed according to some formula or other. That might be effective but will be pretty complex to set up, and takes away power from councils. And over time the temptation for treasury to hang onto a slice of it to cover central government costs might be hard to resist.
@nebilion
We need a local tax for locally supplied and funded services. Per house or per capita, although it didn’t go down well last time – I vaguely remember my court summons for not paying
And also a property or land value tax paid centrally. 0.5% seems ok and obviously it needs to replace stamp duty. Those who have recently paid a large amount of stamp duty should get a temporary credit. Those who are cash poor should be able to roll it up for future payment (with interest). Hopefully this would have a very calming effect on property prices. Landlords trying to pass costs to renters may be an issue
We really need to simplify people moving from region to region and downsizing. Freeing up some of the 20m empty bedrooms would be very handy right now.
Who knows people may move north and to Scotland to reduce living expenses – retirement, WFH, not working etc etc
@Al Cam, sorry meant to get back to you yesterday, but forgot.
AFAIK the Treasury Orders increase in uncapped CPI+1.5%. Pensions Increase is just uncapped CPI. That was the answer my daughter got back when she asked the question!
I agree it is a good scheme, likely fairer and less risky for most employees than a final salary scheme, just not worthy of the absurd envy and disgust thrown at it by the right wing media.
@Martin T “In my daughter’s case, a 13.6% annual pension, uprated each year by inflation, and guaranteed for life, was always going to beat the Scottish Widows group personal pension default investment option, however long she had till retirement.”
Scottish Widows must be really bad then 😉 but she could have transferred to something like a Vanguard SIPP and put into into a LS fund if she wanted a cheap and simple DC option. The point is though, she did not get a “13.6% annual pension”. That 13.6% needs to be adjusted for investment growth for the period between transfer and retirement. Only if there was no real growth would that translate into a 13.6% annual pension. It is really critical that people who transfer in or out of DB schemes understand the importance of this period.
@Naeclue (#138):
No worry.
Thanks for the info.
The 2015 document (link at #125) at page 6 (and in several other places) clearly say “Treasury Order plus 1.5%” and elsewhere (for the deferred case) “Pensions Increase”. Perhaps these are two different things that both happen to decode to uncapped CPI, but why give them different names. Odd?
For info, the sort of order I was thinking of is officially called “The Occupational Pensions (Revaluation) Order” but is often referred to as
just statutory revaluation. This is either cumulative CPI capped at 2.5% PA or 5%PA.
When did the media (right, left, or any other persuasion) ever let the facts get in the way of a good story! Having said that, there are IMO several generous provisions, namely: no caps and above CPI revaluation. I also think the up to 5 years gaps thing has been implemented in a generous manner, although I applaud what I take to be the objective. My own private sector scheme went through a revamp from a FS scheme to a CARES scheme a number of years before 2015 and in the round was IMO somewhat less generous; although, like the NHS scheme, some of the terms were more generous for actives vs deferred. IIRC, the only innovative feature in that revamp was an algorithm that was sold as being a risk share on further improved longevity!
@Naeclue #139 if, at SRA, inflation, compounded, is 100%, then the value of pension paid out has doubled, as has the notional value of the original lump sum – still a return of ~13.6%, index linked in perpetuity, with survivor’s pension etc.
I accept that it is possible, perhaps likely, that the sum invested elsewhere would have increased further (and that one gives up certain flexibilities), but that is by no means certain, and carries a number of risks, particularly for someone who has little interest in these things. And the growth would have to be significantly larger to enable the purchase of an equivalent annuity.
No one can know at the start which is the better bet; it’s a question of weighing a lot of factors and making a decision which works for the individual.
@ermine, at #103 you said: Watch for: the cost of the turn, the fact that your capital gain added to your existing income takes you closer to higher tax thresholds that also affect CGT rates you pay that may kibosh any advantages of getting in ahead of any changes
possibly because I don’t have any unsheltered assets that a CGT liability could attach to I haven’t thought much about capital gains. But where does that suggestion that a capital gain could put you in a higher income tax bracket come from? I can’t immediately see the basis for this anywhere
The gain is added to your income to determine whether you pay higher rate of CGT. It doesn’t increase your income tax. So let’s say your total income (including interest and dividends) is £40k, you’ll be basic rate income tax payer and lower rate dividend payer (if you have taxable dividends). If you realise a £20k capital gain (after allowable costs) then some of that CGT will be paid at the higher CGT rate, because £40k plus £20k is over the higher rate income tax threshold
@Martin T, I completely agree that no one can know which is the better bet and a lot of factors goes into the decision, but doing a proper calculation helps in the decision. It’s really not hard to come up with a ball park figure for the growth required to match the pension being offered.
For example, assume an annuity rate for someone at SRA of 4.5% (you can play around with this number). If you are being offered 13.6% now, that means each £1,000 at retirement is costing £7,353 now (£1,000/13.6%). At SRA it would cost £22,222 (£1,000/4.5%). So what rate (real rate) would turn £7,353 into £22,222 over say 30 years (insert your own figure)?. The answer is about 3.8% ((222222/7353)^(1/30)-1).
3.8% real is lower than the historical average return of a 60/40 portfolio, but depending on who you want to believe, going forward estimates are mostly for lower returns. Then there is the risk the forward annuity rate might be much lower than it is now, etc. The point is that a figure for a required growth rate is much more helpful in making an informed decision than whatever the conversion rate being offered today. Unless very near retirement of course.
Some of the offers for going to/from a DB pension can vary enormously and often defy logic. They can be fantastic deals or totally derogatory. Take the NHS scheme as an example. At present someone a month away from retirement can buy an Additional Pension, which is CPI linked for a generous rate of 5.5%, but on retirement if they want to go the other way, converting par to their pension to a lump sum, they are offered a lousy 8.3%!
A few years ago some people were offered fantastic deals to come out of DB pensions as many employers wanted to close their DB schemes, but some of the offers were terrible, even worse than the NHS rate.
@Naeclue #144 @Martin T #141: “A few years ago some people were offered fantastic deals to come out of DB pensions as many employers wanted to close their DB schemes”: If we get a real recession without inflation, then market interest rates should fall a lot and transfer / cash out values should consequently rise. Sadly I haven’t got an option to transfer out any part of my DB.
@Al Cam, now you have me scratching my head again. The language around the pension increases is certainly obscure. I have found this https://www.gov.uk/government/publications/public-service-pensions-increase-2024/note-by-hm-treasury-2024-pensions-increase-multiplier-tables
The arcanity of all this does make me wonder as to the risks surrounding public sector pensions being increased by CPI linked amounts. How hard would it be for future governments to renege on this? Treasury Order being whatever the government decides in future, which could be lower than CPI?
@Dragon #135: God, the situation sounds even worse than I’d imagined. An SNP / Greens / Labour v Tories situation doesn’t promote political competition. This is the danger which Reform face in running against the Tories in England. They give Labour a free pass as it can team up with Libs and Greens and Tories only have DUP.
@Delta Hedge, that is true of all public sector schemes I think. Probably because of a lot of them are unfunded and so the government would need to find the cash to hand over from somewhere else. My daughter’s NHS scheme offers the option though to convert up to 25% of the pension value, defined as 20 times the annual pension, to a cash free lump sum, but the rate is £1 for each £12 of pension (8.33%), so not worth doing for basic rate taxpayers and probably not for higher/additional payers, unless they have a low life expectancy. Or think tax rates are going much higher!
@Naeclue:
Re #146, and the document linked therein: I think the term “Treasury Order” is the more likely of the two to be open to interpretation. I am particularly sensitive/alert to such things having personally lost out (more than once) to similar “shenanigans”!
Re #148, 100% agree the 2015 NHS scheme commutation rate is v poor – but there must be some downside to the scheme. I also think the (rather poorly defined IMO) default NRA is not great; but the option to contribute more to bring it forward may be interesting. I understand from other chats that I have had that the old NHS FS scheme had an NRA of 60 with no late payment factors, so depending on your age, if you are a member of both schemes (and you are only allowed to retire once from both schemes on the same date) it may make some sense to pursue the option to bring the NRA forward in the 2015 scheme.
IMO, DB schemes in general are bedevilled with complexity and are all extremely situational too!
@AlCam, you can retire separately from the 1995 (FS scheme) and the 2015 scheme.
@Naeclue #144 thank you, helpful insights. And there’s another factor which didn’t particularly impinge on the original decision – political risk.
30 years ago I bought a flat to live in, but always with an eye to future rental, judging that lettings and private residence relief, plus indexation, would protect me from CGT. Now I’m sitting on a £70k gain with a £3k allowance (£6k with Mrs T), and the prospect of paying HRT for the first time in my life!
Similarly, my own DC retirement plan was to drawdown my PCLS into ISAs, whilst leaving the rest invested. Now rumours of caps, and even tax, on PCLS, ISAs etc abound.
Another major benefit of public sector DB pensions appears to be that, if changes are made, the scheme rules of earlier iterations are preserved.
@VF (#150):
Thanks for that. I guess that gives more optionality and/or tricky decisions!
@Martin T
You are right. Political/system change risk is always a problem. From fairly insignificant changes to thresholds or amounts, to the other end of the scale seen in places where measures are put in place almost overnight to prevent capital flight, usually just prior to some form of one off confiscation/tax change, these possibilities are always a concern.
The best option we all have to minimise pain is on the expenses side. Yes, we probably should try to optimise savings and investments by using the tax system as intended to organise finances sensibly and adapt as rules change. We maybe should even have some safe contingency outside of the recorded/electronic systems (such as assets you could readily liquidate at short notice like bullion coins or whatever) if you really think a terrible raid is coming; I don’t think we are even close to this being necessary. Ultimately, if you keep expenses down and can live on a lot less than you earn or draw down from pensions, then in the event of substantial tax changes or even extreme capital controls, you will be in a much better position than most.
Even the most socialist government you can think of that is hell bent on confiscating and redistributing wealth from all valuable assets is not going to be that concerned about those managing to live on only a fraction of, or even on, the median income. This is the bit of financial independence that is misunderstood by those not working towards it – if you can live on less than the average person and be content then you should be fairly immune to the most significant tax raids or changes. Tax raids are likely coming, but I really doubt they will look like any of the most severe changes that could happen. Anyone with a portfolio of buy to let properties, or a yacht and helicopter etc might have right to be concerned, but most normal people with some wealth should not e.g. the wealthy soon to be retired GP near the maximum pension lifetime allowance and with healthy ISA balances is likely to be just fine after whatever changes are in the budget.
Regarding DB pension changes though, it is fairly common to force people onto the new scheme but then preserve the rules for the previous scheme up to the date of change e.g in my short stint in a role with a DB scheme, I was on a CARE DB scheme from the start, but some in the wider team had a number of years on the final salary version. They subsequently had two pensions, the final salary version where they had accrued X years and will, at state pension age, get (X*final_salary)/A_rate_1 per year, with inflation uplifts annually, as well as a second pension with Y years based on career average with annual inflation uplifts, so a formula of type: (y_1+y_2+…+y_Y)/A_rate_2, where y_i is salary in year i of the CARE DB scheme and A_rate_j is divisor for each of the two schemes. Basically though, the final salary scheme was closed to all members and additional years could not be accrued (X was fixed), and the employees in the old one then had two pensions under different rules and such. So certainly changes to DB schemes can be detrimental and have been forced on employees, but you are right that it is rare for already accrued benefits to become much worse.
@RC (#153):
There are [many] other ways to implement forced FS to CARES, and any/all such differences can matter too. Having said that, it may be many years downstream until these issues become apparent.
For example, the FS part may become a separate tranche ‘worth’ an accrued cash sum (not just a multiplier/fraction) that is revalued (the rules for which may depend on member status, ie active vs deferred – like the 2015 NHS scheme outlined above) up until retirement. This approach may also force a common retirement date for both the FS and the CARES tranches, even though they have different NRA’s and different ERF’s and LTA’s (again like the NHS schemes above) and, possibly, different accrual rates too.
An ‘interesting’ feature of such an approach is that if this combined FS/CARES scheme is later closed then all non-pensioner members will most probably become deferred, and even if you were still in employment of the provider, you would lose any active member preferential features, such as, perhaps, better revaluation of the DB tranche.
As is usual with all DB schemes there can be devilishness in the details, and even seemingly preserved former accruals (or more precisely the revaluation of these, in this example), can be “got at”.
That the author of this article still hankers to rejoin the EU is slightly bewildering given the state the EU is currently in. I know people live in bubbles, but this is … something else.
And of course capital gains will be increased. Personally, I can’t see it not being brought into line with income tax. I hope I’m wrong, but this is a Labour government after all and we ain’t seen nothing yet.
Happy investing!
#156: Granted that both the EU and UK economies seem to increasingly resemble an open air museum (America innovates, China and India imitate and Europe regulates) but (and with the greatest respect here) your comment makes a leap of reasoning not supported by logic, and, therefore, effectively misses the point.
Being a member of a single market and a free trade area is not, per se, about the benefits / disbenefits of being part of a fast / slow growth region.
Instead it is about avoiding trade friction and costs. The bureaucracy, tariffs, delays, shortages and increased prices etc which necessarily come from the (bizarre and self harming) UK policy choice to leave both the EU and also the single market are equally real and damaging to the UK regardless of the EU growth situation, a situation which, for all practical purposes, is irrelevant to the £100 bn annual hit to UK GDP (and £40 bn p.a. loss to the UK Exchequer) from being outside the single market.