What caught my eye this week.
One way to tell when someone is bluffing is when they rabbit on and on. I got that sense watching Philip Hammond’s Budget on Monday.
Oh, I don’t think he was being deceitful as such – although he did do the standard Chancellor sleight-of-hand trick by not revealing a National Insurance hike (see below) while boasting he was cutting taxes.
I also recognise his need to pepper his speech with dad jokes. Nobody wants to be known as Spreadsheet Phil, and Hammond has spent all his Budgets trying to shake that off that putdown with his Open Mic for MP gags.
But as the speech ticked past the hour mark, I sensed he really was making something out of nothing.
Rarely has so much been said by one chancellor for so little consequence to the status quo for the many, or the few.
Perhaps he was trying to bore MPs into backing a Brexit deal so they wouldn’t have to sit through an emergency Budget in March?
At least he didn’t tamper with pensions or ISAs.
- Summary of Budget 2018: Key points at-a-glance – BBC
- Are you a Budget winner or loser? Do the maths! [Calculator] – via Investors Chronicle
- More Budget-in-brief coverage – ThisIsMoney / Guardian / BBC
- Sneaky National Insurance hike may take back some of your tax cut gains – ThisIsMoney
Was there anything in the Budget small print that caught your eye?
From Monevator
The reader discussion following our recent annuity post is a must-read – Monevator
From the archive-ator: Passive investing when the stock market crashes – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Northern England house prices to rise at faster rate than London – Guardian
See how these ‘penny pinchers’ retired in their 30s [Video, feat. MMM] – PBS
Parents to get child benefit fine refunds as HMRC makes shock U-turn – Your Money
‘Red October’ wrongfoots bets on market bull run [Search result] – FT
Are you rich and what do you get compared to the tax you pay in? – ThisIsMoney
Products and services
Nutmeg is rolling out a phone-based advice service – CityWire
Monzo has introduced savings pots that pay… wait for it… interest! – Monzo
Leeds BS’ 0.99% discount mortgage is cheapest since BOE rate hike – ThisIsMoney
Ratesetter will pay you £100 [and me a bonus] if you invest £1,000 with it for a year – Ratesetter
NS&I got a boost this year, but there could be cuts to come – ThisIsMoney
What’s inside Vanguard’s new ESG ETFs? [US products, but they may come our way] – Morningstar
How market destruction gave birth to the ETF [Podcast, multi-part series] – Bloomberg
Comment and opinion
No one is crazy – Morgan Housel
Where the risk lies in a balanced portfolio – A Wealth of Common Sense
The upside of market corrections – UK Value Investor
Cash holders need a new drug – Abnormal Returns
The surprising power of the long game – Farnham Street
How to debate finance without being a jerk – Bloomberg
Get rich by being British – The Escape Artist
The 18-year property cycle – My Deliberate Life
Boutique fund managers are the best bet to try to beat the market – Institutional Investor
For active stock pickers: Making sense of the market mayhem – Musings on Markets
The biggest rallies come in bear markets – All Star Charts
Dear first-time angel investor – Roy Bahat
After 10 years, Bitcoin has changed everything… and nothing – Wired
Brexit
Handy site tracking trade deals negotiated so far, per country – H.W.G.A.F.T.D.Y.
No deal Brexit could see interest rates rise [or fall] – ThisIsMoney
On news that David ‘Oops I Did A Brexit’ Cameron is mulling a return to politics – HuffPo
George Osborne has also confessed to regrets about the EU Referendum – BBC
Kindle book bargains
Anything to Declare?: The Searching Tales of an HM Customs Officer by Jon Frost – £0.99 on Kindle
Tiny Budget Cooking: Saving Money Never Tasted So Good by Limahl Asmall – £1.09 on Kindle
The Strategist: Be the Leader Your Business Needs by Cynthia Montgomery – £0.99 on Kindle
Off our beat
Humanity has wiped out 60% of animal populations since 1970 – Guardian
Cock Unsure: Some men are resorting to penis fillers to boost their self-esteem – BBC
What it’s like to listen to cricket on the radio for the first time – Young Vulgarian
Waitrose editor resigns after making a private joke. Book burning can’t be far away now – BBC
Empathetic budgies yawn when they see their peers do the same – New Scientist
A surfeit of lampreys: First evidence of stomach-turning medieval delicacy found in London – MOLA
Have you tried ambient literature? – Refinery 29
And finally…
“The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil.”
– John Kenneth Galbraith, The Great Crash of 1929
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A number of things caught my eye with the budget.
I’ll try to keep factual opposed to political.
Firstly there was meant to be an extra £20Bn for the NHS as per the Tory conference. That was just hot air since there is £20.5 Bn over 5 years for the NHS – and there was me thinking it was every year an extra £20Bn. The reality is compound RPI over the next 5 years is pretty much that £20.5Bn under the assumptions RPI stays where it is now, which it won’t as RPI also adds in mortgage increases into its index, which of course there may be as interest rates potentially increase.
Then there was the extra £500M for the Housing Infrastructure Fund to , and I quote, “unlock a further 650,000 homes”. Excuse me? How on earth will it do that? Not that we have the tradesman to do that either.
Then the NI con. So increase the 40% threshold to £50K along with increasing the 12% NI threshold, thus leaving a 10% delta from £46K to £50K, but I can honestly say I don’t oppose that. I DO oppose the fact he only raised the NI threshold by 2.4% at the lower income end. Why could he not have put that in line with £12500 like tax. It just makes the tax system so complicated for starters e.g
0-8632 0%
8632 – 12500 12%
12500 – 50000 32%
50000 to 60000 different depending on kids claiming child benefit
60000 to 100000 42%
100000 to 125000 62%
125000 to 150000 42%
150000 plus 47% along with pension allowance reduction.
What gets me most is the fact he changed the NI lower threshold by 2.4% to £8632. Thus meaning lower income earners missed out on the full 20% increase to personal allowance and got a paltry 8%!
Smoke and mirrors. Or is it Snake and mirrors? I think what I hate the most is the pure lies, and the complete and utter lack of investment in schooling. The “for the little things” money is a pencil per school. If we are to have a successful future, Deal or No Deal, we need to give our children a good education, but all that seems to be happening is pandering to the older demographics.
Gee I’m grumpy today!
What caught my eye in the budget? Abolition of lettings relief, which in one fell swoop will take £11,200 off me in tax. The only way to avoid it seems to be to sell up before April 2020, but the property in question is now my home (again) and I don’t feel much inclined to be bounced into moving home before I’m ready. The effect of the measure may in fact be that I end up staying here longer than I’d planned so as reduce the proportion of profit that’s CGT-taxable. If the Chancellor’s aim was to flood the market with ex-rental properties it won’t have worked in my case.
This might interest some… https://www.nybooks.com/articles/2018/11/22/financial-crash-that-failed/
Book review.
@Tyro
Yes, and he also cut the period at the end of ownership from 18 to 9 months, when it was 36 months just a few years ago. It’s a tax on accidental landlords who have been forced to move house for work or other reasons. These days it doesn’t make sense to sell up and buy another property somewhere else because the labour market is so “flexible” and stamp duty astronomical.
What is also pretty outrageous is the retrospective aspect to this. You take one of course of action (rent your house out) based on the knowledge that lettings relief is available, then years later they go back in time and take the relief away.
He did a similar thing with Entrepreneurs Relief by extending the period of ownership from 1 to 2 years, but based the new rules on the date of sale without any transitional period.
How does one become an accidental landlord? I would have thought it would be a very conscious decision requiring quite a lot of thought around pro’s/con’s.
There is no interest tax deduction when taking on debt to buy a place you want to live in yet there was/is if you wanted to take on debt to rent the place to somebody else. This gave landlords a big advantage over those just wanting to buy a place to live and raise their family. It also encouraged landlords to back the truck up on debt which when combined with debt being ridiculously cheap for years has helped to bid up prices to the silly levels we see today. I’m a big fan of Section 24 and look forward to when it is fully implemented as it may help to rebalance the system a little.
Full disclosure: I’m all for investing but I’m not a fan of restricting basic human needs to those that need it by doing so. Shelter is one of those needs and BTL when combined with other UK anomalies does that. All IMHO of course.
@ RIT
I won’t get into the debate about the rights and wrongs of landlords in general as I don’t think that has anything to do with these measures, which are also capital gains tax related and have nothing to do with interest deductibility.
How does one become an accidental landlord? Somebody who buys a house to live in with their family might lose their job and move to take up alternative employment elsewhere outside of commuting distance. Immediately selling their family home and buying a new house in the new area would be unwise and they probably wouldn’t be able to port their mortgage anyway with the new job not being secure yet. So they move into rented accommodation and rent their old home out to keep their cashflow positive (being taxed on that rental income in the process of course).
A few years later their situation has improved and they decide to sell their old home and buy in the new area. They still benefit from a capital gains tax exemption on their old home pro-rated for the periods of non residency. This is mitigated by the last 18 months being deemed a period of occupation and a limited £30k additional allowance called lettings relief. With the annual allowance of around £11k as well they probably end up paying no CGT at all, although the house move will still cost them perhaps £30k-£50k with stamp duty, legal fees and so on. This puts them on an equal footing with every other owner-occupier moving home.
With the rules announced by the Chancellor on Monday, what is going to happen is that the tax man is going to retrospectively take a trip back in his time machine and decide that these reliefs weren’t available for the previous x years after all, despite this being part of the conscious decision made by the homeowner at the time.
We often hear that provincial dwellers should be more willing to move to where the jobs are (like immigrants do). Why keep raising taxes like stamp duty and now erode capital gains tax reliefs as well, when these are the financial barriers that stop people doing that? And how can it be fair to change the rules retrospectively?
@David
Like you I think that stamp duty is wrong as it reduces societal mobility which can lead to unnecessary strain on families through things like commuting significant differences for work. The societal asset that is taken when somebody buys a home is the land and so I’m a believer in a monthly/annual land value tax in place of stamp duty.
I also think capital gains tax is wrong in it’s current form as it should at least correct for inflation as you haven’t made any gains on that bit but merely had the unit of measure devalued.
Where I do have a problem though is where government picks its favourites. Now if we are to live in a true capitalist society (which we don’t) then there should be a few favourites to ensure society sustainability – helping the truly less fortunate which is where a citizens income might come in, encouraging us to tread lightly on the planet… What I don’t see is required is that if I take on debt for one asset over another I get tax favouritism. Why should I get a CGT relief when I’m not living in the place or why should I get lettings relief when the renter next door is not getting any of these reliefs on their share portfolio? It encourages distortions which is why we have some of the housing mess we currently have.
@ RIT
Fair enough, but you said yourself in your first comment that shelter is a basic human need, so that suggests home ownership should be treated differently from a shares portfolio for example. These particular tax changes specifically target residential homeowners!
I’m quite sanguine about the moral rights and wrongs of what gets taxed and what doesn’t – that’s politics and comes about through democracy. But at the risk of repeating myself, what I object to is changing the rules after the event! If the other lot get in and JM in his first budget decides to bring back taxes on “unearned income” like we had in the 1970s, then that’s all well and good even if it hurts me personally. But what wouldn’t be fair is if he looked at RIT’s super-sized ISA and pension funds and how much it’s grown in the last 10 years, and decided to raise an extra tax on all the gains made since 2008!
@David
Yes shelter is a basic human need and so as I said previously I don’t think somebody taking on debt to let the home to somebody else should be advantaged over somebody taking on debt to live in it with their family. Not for a second am I saying home owners should be ‘helped’ or favoured as that again creates all sorts of distortions like Help to Buy which has done everything but help the people buying a home to live in. I’m just saying they shouldn’t be disadvantaged.
I also have no issue with paying my fair share plus helping the genuine needy and have certainly done that. What I do have a problem with is one group being fleeced while another group is favoured creating distortions. If another lot gets in and decides to fleece me even more than now to prop up their favourites or if they are just prolifigate with our money then that’s where I’d also like choice to operate under another lot. That’s a reason I’m against Brexit but now I’m seriously off topic.
David,
Perhaps I’m misunderstanding you, but how is it retrospective if it comes into effect in April 2020?
How to become an accidental landlord? Move house just a few weeks before the Brexit referendum, managing to avoid a buying chain in the process.
You either accept that the high property transaction taxes will severely reduce liquidity, thus impeding labour mobility, downsizing, adding stress to divorces, etc., OR you accept that it will be much more common for people to become a ‘landlord’ rather than a distressed seller. This budget confirms that there will be more taxes whichever side of that bargain you strike.
I can’t say I blame the Chancellor but personally I would be in favour of higher annual real estate taxes (more, higher council tax bands for starters), fewer exemptions for primary residences (e.g. capped principal residence relief) and lower transaction taxes (to enhance flexibility/mobility), all in all which would be less distorting on behaviour and harder to dodge.
@FvL
…OR as you mention in your second paragraph you tax the land they are occupying at that point in time while removing transaction taxes making it easier/more cost effective for people to move/upsize/downsize as their needs require. No need for as many ‘landlords’ as we have today.
Interesting you mention capped principal residence relief. There are EU countries where this is in place with you getting a lifetime CGT allowance for your principle residence. I’m moving to one of them.
The budget puts a tricky issue into the lap of the Scottish Government. Does it follow suit and raise the thresehold for the tax bands? The current difference is quite small but from next April the higher rate will start £6,570 lower in Scotland that in England. That might be a hard sell.
@ arty
When you sell an asset the “capital gain” is a calculation of sales proceeds minus cost over the period of ownership, and this what you pay tax on. In practice you don’t pay capital gains tax on a sale of your own home because of 100% principal private residence relief. If you sell your home in April 2020 after 10 years of ownership but you rented it out for 3 years from 2014 to 2017 then you only get tax relief on 70% of the period (7 years out of 10). However, this is mitigated by lettings relief of £40,000 so homeowners aren’t penalised for moving away for a period during ownership, for example to take up a new job or look after elderly relatives or some other reason.
The change is retrospective because the period from 2014 to 2017 will now become taxable for a home sale after April 2020, even though those 3 years are completely in the past and happened when there was a tax relief available to cover any gains made during that period. In comment #2 @Tyro is saying that the government is taking £11,200 from him, which is the £40,000 relief at 28% capital gains tax.
You could say at least we have 17 months warning, but as I’ve already mentioned it costs a lot of money to move house so it’s hardly worth incurring all the extra expense. Also if you’re back in the home you never wanted to leave in the first place then all you can do is stay in it for longer so that the non-residential portion grows as a percentage of the total ownership period.
It wasn’t a nothing budget, main points:
– Much more generous government spending, concentrated on health, defence and DWP (pensions and universal credit)
– Higher taxes on landlords/cut backs on entrepreneurs relief/tax hikes for the self-employed (just look at the landlords squealing already above, IT contractors will be posting complaining in a minute)
– Pledge to eliminate deficit basically abandoned
It looks to me like the Tory pitch for the next election is Brexit plus christian democratic style continental policies, which would involve much more state spending, much more state intervention and higher taxes than has been the case in the UK for the last nearly 40 years
@David
Since you have to tax something, a good place to start is unearned gains or inheritances
You say: “These particular tax changes specifically target residential homeowners!”
No, it specifically targets people who have enjoyed very large unearned gains in house prices in the south of the UK from the government bail-out via low interest rates that the whole country financed…. and it takes only a small proportion of those gains
Excuse me while I find the world’s smallest violin
> I also think capital gains tax is wrong in it’s current form as it should at least correct for inflation as you haven’t made any gains on that bit but merely had the unit of measure devalued.
This idea has been floated by Republicans in the US recently. On the flip side, presumably savers who have enjoyed returns below inflation could use this loss to offset their taxes? If we’re to use real returns as the baseline it seems it should go both ways.
It was (for once) a good budget for us as wife+myself now retired so we can take more from pension each year (her full PA, me PA+20% bracket) and we won’t be hit by the NI rises.
OTOH I have just had to pay £20k in tax from my pension due to TAA and LTA changes, which wasn’t very pleasant. Oh, and daughter is an “accidental landlord” due to being a junior doctor away from home on placement and having to rent a house elsewhere and rent hers out to friends. Her tax return will not be pleasant and it seems that it’s my job.
@Gadgetmind
The irony of someone complaining about paying taxes when their offspring’s chunky salary and fat cat defined benefit pension is solely funded from other people’s taxes is obviously not on your net worth spreadsheet and therefore invisible to you
Tax must come from somewhere. The fact that wealth and property is not taxed anywhere as much as earnings and spending says a lot about the UK.
Any budget changes makes both winners and losers – for better or worse.
@Gadgetmind
I dont consider it much more generous spending on the NHS when it is in effect compound RPI for the next 5 years.
More importantly why next to nothing for the education system? This country needs engineers, scientists and good trades people (did you see apprenticeship levy was cut?).
But most of all its the lies and deceit when peddling the numbers in the house I feel is wrong just for a good headline in the Tory faithful newspapers. I’d dearly love to see an honest minister and political party. Clearly that’s a fantasy currently.
@A beta investor – re: tax band differentials in Scotland.
Unfortunately (for those resident in Scotland) I don’t think it does present the Scottish Government (SNP) with any problems. They’ve already stated that they are pursuing a “fairer” (read: higher) tax policy for Scotland, and an increase in the bandings before higher rate tax applies will be all to easy to respond to along the lines of “we won’t be following tory tax cuts for the rich”.
Scotland has a much lower population than England, so less people will be affected in numerical terms, and it will thus be harder for them to exert any political influence, unless someone with widespread appeal / influence takes up the cudgel on their behalf.
The reason for the £50,000 figure in England is because in England, I suspect *a lot* of public sector workers are on a salary bracket between £40,000 and £50,000 (if a cursory look at the Guardian’s public sector job adverts are anything to go by). Now, whilst that’s coming on for twice male average earnings across the UK, in the real world, it’s not actually a vast amount on money, and in London probably barely puts you above the breadline.
All of which is a way of saying that freezes or lower than inflationary increases to the amount after which higher rate tax bites probably played really well with public sector workers, until more and more of them found themselves in that bracket.
A conservative government making a hash of Brexit negotiations has probably realised that the last thing it needs right now is a vaste swathe of the public sector, organised through the usual unions, kicking up a stink / going out on strike about how they’re being “taxed as if they’re fat cats”…
In Scotland however, I don’t think there’s the same critical mass of (relatively) well paid public sector workers, so the SNP will go on merrily widening the differential until:-
1. They hit the wrong point on the Laffer Curve; and/or
2. Possibly earlier, hit the point when the [x*]% of taxpayers who account for [xx*]% of total revenues start to decamp or reduce their hours.
[*we all know what’s meant here, the notion that a relatively small amount of taxpayers actually make up t a large bulk of income tax receipts. Exact figures vary depending on your personal prejudices (and note, this relates only to income tax receipts, not other tax receipts) but this article from the Telegraph from March 2017 – https://www.telegraph.co.uk/news/2017/03/19/tax-burden-wealthy-has-trebled-since-1970s-telegraph-analysis/ – suggests that the top 10% of taxpayers account for almost 60% of total income tax receipts and, perhaps more interestingly, at that point in time, an income of just £51,400 per annum put you in the top 10%…]
This problem will become more acute for Scotland, as the £12,500 increase to the personal allowance will apply in Scotland, and could potentially take a lot of people at the lower end out of tax completely.
An SNP party pursuing high tax, high spend, big government policies is thus going to have to increase taxes quite substantially on a shrinking tax base to maintain their funding commitments, or else start scaling back on those commitments.
Either way, they’re going to upset people, it’s just that the numbers complaining in the former group will be (for a while at least) smaller in number that those in the latter group.
Given that the SNP only got their last budget through with the support of the Green party, who insisted on this tax policy, it’s going to make for interesting times…
Odd that some people working towards FIRE want higher taxes on wealth and property, especially on their primary residence. Council tax is already high enough thank you, it can easily exceed 20% of the income of someone on the state pension, and likewise hoover up a big chunk of any frugal FIREees income. Its very hard to avoid.
I thought it was an OK budget all things considered, an extra 500 quid a year and despite all the hype pensions left alone. Moving the pension annual allowance from 40k to 30 or 20k would have been very simple to implement compared to the alternatives. At least for DC schemes and SIPPs.
As for the weekend links I liked UK Value Investor who has a similar planned strategy to myself, live off the dividends and you won’t lose sleep over having to sell in bear markets.
And the 18 year property cycle, will be interested to see if that pans out around 2025.
I agree a Brexit deal – ANY deal – could well end the mid cycle dip we currently appear to be in.
And if we get another bear market in stocks the UK public will further cement the idea that nothing beats bricks and mortar.
Are those income figures accurate. I can’t believe a single adult earning just above 40k is in the top ten percent of earners? Is this skewed by single pensioners who are asset rich but income poor? Even the 2 adult figures don’t look high?!
Following up @James point, I don’t understand that table either. I can understand why a 2 person household might have a higher median income given that so often both work, but why does having kids always drive up median income in each decile, whether one or two adult families, and how two kids correlates with a higher income than one.
I suppose at the lower end there could be the impact of benefits (both child and in work), but why at the higher end? I checked the original Government report referenced, but couldn’t see why?
Does anyone have a clue?
The problem in Scotland is that there is already an acute shortage of doctors and head teachers. If the tax structure makes it even harder to recruit those and other such reasonably well paid posts it makes it tougher for the SNP to achieve its health care and education targets.
The problem for a left wing government like the SNP being next door to a right of centre government that reduces taxes is that people vote with their feet. Scotland already suffers a brain drain, unless action is taken it will get worse.
@James @Old Eyes – I read the table as “to be in the this decile of gross household income given this household composition, this is what you need to earn.”
Though obviously, I could be completely wrong.
I’m off to Finland on Friday. Google says the Finnish for lamprey is ‘merinahkiainen’ – at least I won’t order it by accident now.
Or it could be the opposite driver to @old_eyes’ reading – ie high income households choose to have larger families. Somehow I doubt people are that rational.
@old eyes – here’s the full PDF.
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/661465/distributional_analysis_autumn_budget_2017.pdf
On page 21 section 3.8 is says..
“Defining income and ranking households
3.8
This distributional analysis uses equivalised net household income, before housing costs, as the main indicator by which to rank households from lowest income to highest income. This indicator is comprised of several components:
• equivalised: equivalisation is a process that adjusts a household’s net income to take into account the fact that larger households will require a higher net income to achieve the same standard of living as a household with fewer members. The equivalisation factors used in the analysis are the modified OECD factors (as used in DWP’s Households Below Average Income publication)…”
Given that the median income of the top decline is more like £80k I think the numbers have been adjustment to illustrate what an equivalently wealthy number would be based on different family sizes. Not actual data by family size.
I may be wrong but that’s where I got to last time I looked at similar figures.
For the very keen-
https://ec.europa.eu/eurostat/statistics-explained/index.php/Glossary:Equivalised_disposable_income
This link is quite interesting and shows the gross income percentiles for U.K. tax payers.
May not fully reflect self employed, but an interesting yard stick to measure yourself against (perhaps!).
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/685507/NS_Table_3_1a_1516.xlsx
@old eyes (I think my previous post got lost)
I think the answer is that the data in the table is adjusted to reflect the size of different families.
The ONS call this income equivalisation – plenty of links for this eg.
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/compendium/familyspending/2015/chapter3equivalisedincome
The numbers are “equivalent” incomes for different family sizes. So each row shows what each family would need to earn to feel equally wealthy. Hence why the bigger families show larger incomes – because the need it!
I much prefer unadjusted data.
B
That a family needs to earn significantly north of £50k to break even with tax paid/government services and welfare received is a shocking indictment of the churn of government. A sole bread winner with one child earning a taxable £55k would pay about £15k in tax and NI and yet only just be neutral.
Through fairly generous long term pension and saving incentives, as a country, we seem to have got into a very strange situation. From next year and ignoring tax on unsheltered investments I will be able to take £50k from my SIPP and pay £7.5k in tax, so an overall rate of 15%, despite the fact I got 40%+ tax relief and NI relief on my contributions and have already taken 25% out tax free. If that £50k came from employment I would have to pay NI on top and suffer the cost of employment, both direct from travel costs, etc. and in loss of free time.
In addition I can make £2k on dividends tax free, £500 in interest, and if I want to £7.5k tax free spare room rental income. Add to that any amount I want to take tax free from my ISA.
Something has gone wrong with our tax and savings incentive system if the idle moderately well off are able to pay substantially less tax/NI on their income than an equivalent person who earns the same solely through employment.
I am not entirely sure what the answer to this is, because we do need to incentivise saving. Perhaps a higher rate of tax on pension earnings above a certain amount and a lifetime limit on contributions to ISAs?
It’s worse than that-I believe you can take £1000 in tax free interest from Savings every year
Re our tax and savings systems -it is always the ones interested in Pensions and Savings that do well navigating the river
Most Brits unlike our American cousins do not do hands on cash management
I do take hope from the fact that Pensions have replaced House prices in after dinner conversation-progress?
xxd09
@ Naeclue – that reads just like my retirement planning spreadsheet! Yes, pretty tax efficient but as I was often paying six figures in tax PA when working, I kind of feel that I’ve done my bit, and others can now take over.
Thanks all for the clarification about equivalised incomes.
I guess you have to read these tables alongside actual income data. It’s all a bit confusing and I don’t think the target audience in ThisIs Money would take the time to understand it.
Interesting that if we assume gross incomes are ‘equivalised’ (horrible word) to the single person, it suggests that the actual median income of a top decile 2 adult 2 child family is only about half what would be required to achieve the same quality of life as a single person. In itself odd, as housing costs do not scale with the number of people in the household and singletons are forever complaining that they are very badly treated on costs compared to families.
“Something has gone wrong with our tax and savings incentive system if the idle moderately well off are able to pay substantially less tax/NI on their income than an equivalent person who earns the same solely through employment.”
That’s the result of about 39 years policy by successive governments, pretty deliberate. You only have to look at the situation with inheritance tax, entrepreneurs relief and investor visas to complete the picture.
That’s the reason why Jeremy Corbyn, with a fairly left of centre set of policies for continental Europe, looks so shocking to the right wing UK press.
@Naeclue — While not entirely disagreeing with the direction of your thoughts, I would point out that the reason many people consider saving into pensions is precisely because of that tax rate differential — i.e. It’s not a bug, it’s a feature. I know you know this, but it seems a little odd that you decry it now. Would have locked money away for 20-30 years without an incentive from the tax man? I’m not sure I would, or certainly not as much.
Other people you know and see in the street had a lot of fun with money that you instead saved. Don’t beat yourself up too much over it, it’s a minority sport.
(As ever, I’d focus my inequity thoughts towards the direction of inheritances giving vast unearned sums away to people who’ve neither worked for it nor gone without for it. But equally as ever, I don’t expect many to agree with me for reasons I will never understand. 🙂 )
@naeclue & TI
Got to agree with TI. If retirement savings had to come out of taxed income, everyone would use ISAs and regular investment products.
The solution to unfairness between higher rate and lower rate isn’t fixing relief at 30% – this would complicate the affairs of millions of workers. A better option would be to limit available relief through a tax relief LTA, rather than total pension pot LTA whilst maintaining tax-free status of funds within pensions. Everyone can access say inflation linked £150k of tax relief, enough to last the lifetime of a lower earner, still worth claiming for higher earners. But this misses the point I suppose of the current LTA, which is to limit the lost tax revenue of sheltered funds.
Going back to lettings relief, can anybody explain what might be meant by the term “shared occupancy” as in “From April 2020 the relief will change and only be available to those who are in shared occupancy with a tenant” [from HM Treasury publication, Budget 2018, Private Residence Relief: changes to ancillary reliefs, amongst others]?
@TI, I think decry is too strong a word. I have benefited from past policies, on PRR, PEP/ISAs and on SIPP contributions before Alistair Darling capped the annual allowance at £50k, and I do not really want to see assets I have taxed any more than they are. I also agree that savings should be incentivised, but I question whether we may have gone too far with the incentives and reliefs. I for one would have saved even if I did not receive substantial tax benefits with SIPPs and ISAs to do so. Being in a position where I can live off my investments compared with the much more arduous activity of working for my income would have been incentive enough for me.
As you say, extend that to inherited wealth and you have some people who did nothing at all to merit the position they find themselves in paying less tax than those who are working hard for it.
If pension contributions came with a flat 20% relief, I suspect people would still contribute to them. Similarly if ISAs had a maturity date coinciding with state retirement date, I would have put just as much in as I have.
@TI inheritors often have gone without as their frugal and cautious parents have not spent money on them as they were growing up, or received substantial gifts as adults.
If and when @TI decides to have children his viewpoint on inheritance tax will change.
No, really, it will. You may not think it currently, but it will. I had the 1st of my two children older in moderately later life (just over 40) and it really does change your perspective on things.
As for Pensions. A flat rate of 20% as described above means it’s not worth adding into a pension – it may as well just be an ISA – actually more cost effective albeit you cannot add as much per year. 30% has been tabled before by the previous pensions minister (Webb), but that is still tax on the way in and on the way out.
Remember all we’re really talking about here is tax deferral. I do not think they can change the current system’s tax relief bar tinkering with yearly limits and lifetime allowance. From my point of view, I think their best move would be to severely hamper the 25% tax free withdrawal to some CPI linked amount or lower the percentage. I think any other method would stop people contributing to their pensions which is then storing a ticking a time bomb.
That said I’ve always thought chancellors are not very numerate and the Treasury who do the crunching spin it to sell it to the chancellors without the consequences. Hence we do get some rowing back sometimes from a chancellor. Pasty Tax, 10% Personal Allowance.
On another thought. You know that £100K to £125K 62% tax rate? That’s been at £100K since Nov 2009. So a compound rate of CPI between November 2009 and 2018 is 30.28% according to the ONS. Or put another way that £100K limit in 2009 is now equivalent to just under £70K. What’s the official wording for that tax creep?
It always seems odd to me to moralise about inheriting wealth – isn’t it equally unmerited to inherit a high IQ, good health, high energy, cheerful personality, attractive looks, and whatnot?
Speculating about the economic consequences of these various forms of good fortune seems fine to me, but the moralising seems footling.
“What’s the official wording for that tax creep?”
‘Fiscal drag’. Or were you thinking of that other tax creep, Gordon Brown?
I see the Ministry of Justice want to reintroduce their much maligned Death Tax, as they make the probate system a cash cow to subsidise the rest of the court system.
https://www.gov.uk/government/speeches/announcement-on-probate-fees
@dearieme “….. odd to moralise ….. equally unmerited …..”
Spot on! We are all an amalgam of inheritance and experience, no more and no less.
Dearieme,
Try gifting, transferring or otherwise losing to somebody else your high IQ, good health, high energy, cheerful personality and attractive looks.
“Try … transferring … to somebody else your high IQ, good health, high energy, cheerful personality and attractive looks.” Some people achieve this by having children.
Dearieme,
There’s barely a subject that people moralise about more than having children – whether to, when, with whom and how to do it well once with us.