“Relics of the past are lingering in the tax system and when combined with additional rules have created something like Frankenstein’s monster. Instead of being a coherent well-oiled system the taxation of savings has had numerous bolt ons, which makes the whole thing confusing for the industry let alone consumers. The issue with the savings industry is not that it isn’t working but that, in some respects, it’s easier for people to take on debt than to ascertain the most tax efficient way to save.
“The Office of Tax Simplification is already undertaking a inheritance tax review and has made it clear that saving and wealth is a top priority. The review of savings considers a wide range of reforms to ISAs, pensions and life policies. Savings plans often include multiple, if not all, of these products and so it is encouraging that the review is looking at the savings landscape as a whole rather than just some aspects in isolation.
“A personal tax roadmap would go a long way in helping people understanding how to navigate what seems to be a multi-dimensional maze of tax and provide transparency to the tax payer.
Overpayment of tax on pension withdrawals
“The overpayment of tax on lump sum pension withdrawals is a flaw in the tax system that needs to be urgently addressed. The problem was triggered by the introduction of pension freedoms in 2015 and is now reaching epidemic levels. The Office of Tax Simplification notes this area is not easily understood by consumers and calls on HMRC to change its procedures, however, with the PAYE system dating back to 1944 it is currently unable to cope. Changes are unlikely to be swift and the concern is that solutions will not be quick enough for current pensioners.
“In the meantime there are ways to avoid overpaying tax. The overpayment issue arises because of the tax code generated when a large lump sum is withdrawn from a pension. However, if a pensioner chooses to take smaller payments, say 3 x £10,000 rather than one £30,000, a different code is generated which means the payments are taxed at a basic rate and there is no need for a reclaim.”
“As ISAs have become more popular there has been a proliferation of types. However, this has meant quirks in the rules. For instance, a 16 year old could have both a Junior ISA and a cash adult ISA but not an adult stocks and shares ISA. And bizarrely, the annual limit of £20,000 is not divisible by 12 despite most people wanting to make a monthly contribution.
“We note that OTS has called for a review of the ISA landscape to simplify it, but perhaps they have not gone far enough. The beauty of ISAs has been their simplicity and that is a brand the government needs to maintain. The establishment of an Everything ISA, recommended by the Association of Accounting Technicians, would mean savers just need to get grips with one set of rules and features. The AAT’s proposal that the ISA is opened as soon as a baby’s birth is registered sets up a new generation of savers with the tools they need.
“As the OTS have pointed out the Lifetime Isa has not been the golden key to solve the savings regime that some had hoped it would be. A review of the ISA regime needs to carefully consider this complex products place and future within the savings regime.