Treasury drops the dampest of squibs on much-anticipated ‘Tax Day’

Tom Selby
23 March 2021

•    Treasury publishes over 30 consultations, updates and policy documents as part ‘Tax Day’ but little of consequence for savers and investors
•    Publications focus on simplification of tax administration, inheritance tax (IHT) and tackling avoidance
•    Pension tax relief and capital gains tax (CGT) left alone – for now at least
•    Long-standing problems relating to overtaxation of pension freedoms withdrawals and underpayment of pension tax relief to low earners remain unresolved
•    Missed opportunity to radically simplify the ISA landscape

Tom Selby, senior analyst at AJ Bell, comments: 

“Today’s much anticipated barrage of publications from HMRC ended up being the dampest of squibs. 

“While reforms to modernise the way tax is administered in the UK, reduce the IHT burden on non-taxpaying estates and deal with tax avoidance are all laudable, this feels like a missed opportunity to tackle some fairly obvious flaws in the system (see end of press release).

“Higher-earning retirement savers – particularly those in public sector defined benefit schemes - will be relieved rumoured reforms to pension tax relief have not materialised, although given the parlous state of the UK’s finances it would be no surprise to see this back on the table in the not-too-distant future.

“Similarly, landlords, property investors and those with assets held outside tax-efficient wrappers like pensions and ISAs will also be breathing a sigh of relief that capital gains tax (CGT) will stay intact for another tax year at least. 

“The Office of Tax Simplification (OTS) previously backed aligning CGT and income tax rates, which many expected would pave the way for an immediate overhaul. Like pension tax relief, while this has been shelved for now it could resurface further down the line so investors should make the most of their pension and ISA allowances to shelter as much of their long terms savings from the tax man as possible.”

Three key missed opportunities on ‘Tax Day’

1.    Savers in ‘net pay’ schemes missing out on pension tax relief 

“Well over 1 million people earning below the personal allowance are being automatically enrolled into ‘net pay’ pension schemes every year. This is a problem because these savers, the majority of whom are women, are not automatically receiving the pension tax relief they are entitled to.

“The Conservative manifesto promised to address this issue and yet to date nothing has been done. Failing to treat this with the urgency it demands not only leaves low earners short-changed on tax relief – it also risks undermining confidence in automatic enrolment and retirement saving more broadly. 

“Clearly the main focus here needs to be on ensuring all workers receive the pension tax relief they are entitled to, although policymakers will also be mindful of avoiding layering extra burdens on employers currently operating net pay schemes for auto-enrolment.”

2.    Overtaxation of pension freedoms withdrawals

“We had hoped the Treasury would use ‘Tax day’ as an opportunity to deal with the problem of people being overtaxed on pension freedoms withdrawals. Sadly, amidst today’s barrage of consultations this major issue was entirely ignored.

“The UK tax system simply wasn’t set up for a world where people have total flexibility over how they take an income in retirement and as a result the Revenue has consistently overtaxed pension withdrawals since April 2015.

“In fact, since then over £700 million has been repaid to savers who have filled out the official reclaim forms. However, we know most people simply don’t do this and so rely on HMRC to repay them at the end of the tax year.

“To give an idea of the scale, in 2020 around 38,000 official reclaim forms were processed by HMRC. In the same year, over 600,000 people flexibly accessed their retirement pot for the first time.”

3.    ISA simplification

“Given the level of complexity that has crept into the ISA world in recent years, today feels like a missed opportunity to build on the product’s undoubted popularity by stripping back the different versions that now exist.

“We have no fewer than six different types of ISA in the UK: Cash ISAs, Stocks and Shares ISAs, Help to Buy ISAs, Lifetime ISAs, Innovative Finance ISAs and Junior ISAs. 

“From simple beginnings the ISA has morphed into a six-legged beast, with different rules governing different versions of the product. 

“We know that complexity puts people off saving for their future, so the danger is people will choose not to invest their hard-earned cash into something they struggle to comprehend.

“We remain convinced that complexity is one of the biggest barriers to genuine engagement and will continue to push for reforms which make life simpler for people who do the right thing and save for their future.”

Tom Selby
Senior Analyst

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

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