Written evidence submitted by AJ Bell
AJ Bell is an investment platform, pension provider and investment manager for retail investors. We provide administration services for our customers in relation to a range of tax-incentivised wrappers including Self Invested Personal Pensions, Small Self-Administered Schemes and Individual Savings Accounts (ISAs, LISAs and JISAs). Our platform and investment services are available to customers holding those tax wrappers, as well as customers holding General Investment Accounts.
AJ Bell currently provides services to more than 280,000 customers representing assets under administration of over £54.3 billion.
Covid-19 tax survey
We have chosen to respond to this inquiry because we believe the Treasury Committee would benefit from reviewing the results of a Covid-19 tax survey commissioned by AJ Bell and carried out by the independent research firm Opinium in May 2020. The survey provides statistical evidence of the appetite of the UK’s general public for a range of potential changes to the tax framework. It covers the appetite in terms of the shape of those tax increases, their extent, and the areas of tax where the public is most receptive to change. The results reflect the views of 2,001 respondents, drawn from the general public, rather than AJ Bell’s customer base, who were surveyed between 22 and 26 May. Participation was weighted to ensure the results were nationally representative.
The full results of the survey are included below, but the key points are:
AJ Bell’s position is that the figures show a majority of the general public have recognised that the fight against the severe health issues caused by the pandemic has required a collective effort, and that this collective effort should extend to the measures which will be required in the UK’s fight for economic recovery.
The ethos sitting behind everything we do as a business is our aim is to make it simple for people to invest. This ethos of simplicity extends to our views on Government taxation policy and wider regulation.
We will support measures, including tax increases and reductions in reliefs; merging different types of taxes; or reducing the number of rates applying to different taxes, where the measures genuinely will help make the tax framework which the UK general public have to navigate simpler.
However, it is important for the Government to recognise that not all measures which, at face value, appear to make taxes simpler actually achieve that aim. The clearest example of this within our field of expertise is pensions tax relief. The Government has faced repeated calls to reform pensions tax relief to a system based around a single, flat rate of tax relief based around the belief that one rate of tax relief must be simpler than multiple rates based on marginal rates of tax. Without getting into the weeds of that debate, multiple attempts at moving to a single rate of pension tax relief have been abandoned once it has become clear to those attempting to introduce the reforms that a flat rate of pensions tax relief will lead to increased complexity in relation to the two highest value areas of relief – defined benefit accrual and employer contributions.
Of course, one means of achieving simplicity would be to avoid radical changes to the key foundations of our existing tax framework, but instead to pull on levers which have previously been viewed as politically unpalatable. The results of our survey indicate that now may be one of the few times in history when a Government would be able to increase income tax – perhaps via a time-limited surcharge specifically linked to recovery from the pandemic – without fear that this would be politically unpalatable. Although, when considering any surcharge, it is worth noting that most respondents to our survey (85%) would prefer to pay lower amounts over a longer period of time, rather than higher amounts over a short timeframe.
Specific tax measures
Turning to some specific taxation measures which the Government and Treasury Committee may be considering:
Reform of National Insurance
Whilst tax purists may argue National Insurance is not a tax, that is how many currently view it. There will undoubtedly be calls for reform of National Insurance, potentially by bringing it into the purists’ tax framework by merging it with income tax and National Insurance. There may also be calls to apply National Insurance on income in retirement.
We do not believe now is the time to introduce such changes. To reference a term recently used by a member of the Treasury Committee, National Insurance is a ‘Dog and Duck’ tax which, if it were subject to significant change, would be a topic of great interest to the general public. The perception of a link between National Insurance and the funding of the National Health Service and Social Security benefits means that even those who would accept an increase to income tax would view the removal of National Insurance via a merger with income tax as unacceptable.
If changes are to be made to National Insurance, then it’s important any solution applies National Insurance fairly. That may include applying National Insurance to pensioners’ income, maybe where pension income is above a certain level, for example the basic rate band. However, applying National Insurance to income on retirement savings is also problematic in a world where individual saving into pensions is becoming more and more important It would create a situation where for many individuals the level of tax relief granted on contributions paid by individuals personally, so paid from income after tax, is likely to be lower than the level of tax they pay in retirement.
Reform of Capital Gains Tax (CGT)
This matter is already under consideration by the Office for Tax Simplification and we have already been an active participation in that process.
The views we have already submitted to that call for evidence can be summarised as a belief that this is a tax which can potentially be reformed, potentially by bringing the capital gains regime closer to income tax, or by scrapping the annual CGT allowance (subject to retention of a low administrative allowance) but balancing this by increasing the amount which can be saved into an ISA each year.
Any reform needs to be based on an understanding that CGT is currently a transactional tax and that a simple sharp increase in the rates will simply lead to individuals holding on to assets to avoid the tax.
Introduction of a Windfall/Wealth Tax
This would clearly be a headline-grabbing measure were it to be announced by the Chancellor at a future Budget. A key question for the Government and Committee to consider, however, would be whether those initial headlines would be outweighed by the negative coverage which would follow when the tax failed to deliver the anticipated outcomes.
The last 30 years have seen most countries move away from wealth taxes, as they have proven to be difficult to administer and easy to avoid. They have been abandoned as a concept across most of Europe over the last 30 years. If, as we anticipate it will be, the Government is seeking international investment, a wealth tax will act as a strong deterrent.
In the past, UK governments have levied industries with such a tax where it was clear there had been under-taxation. The equivalent for today’s Covid crisis would be to levy those industries that have seen business thrive and profits soar. However, there also needs to be a means to pay and it’s that which causes complications.
Another proposal may be to apply an additional levy on individuals, possibly based on their total wealth. However, this would require a great deal of consideration.
Inheritance Tax reform
Whilst we appreciate the potential for reform of inheritance tax extends much further than pensions, AJ Bell has been calling for reform in the way that inheritance tax and pensions interact for some time.
At present assets held in UK pension schemes will generally not be captured for inheritance tax purposes. However, there are anomalies in the system which are not well known amongst the general public, and which can lead to huge inheritance tax liabilities. When considering any tax, an extremely low level of understanding and an extremely high potential liability is a toxic combination and meets the requirements for reform.
The two main circumstances where inheritance tax can apply are where death benefits are distributed based on an instruction from the scheme member rather than under a discretion on the part of the trustees of the scheme, and where someone with a limited life expectancy transfers their pension from one scheme to another.
The first of these can be solved simply by allowing distribution of death benefits to be made on the instruction of the member without the benefits being subject to inheritance tax. In the vast majority of cases the trustees will follow any nomination given by the member when exercising their discretion. And based on research carried out by AJ Bell, a huge majority of the general public believe their nomination is an instruction anyway. So, in terms both of trustee practice and member expectation, the distinction between a nomination and instruction is largely meaningless, making the potentially huge difference in tax treatment a problem that needs to be resolved.
The ill-health transfer anomaly is even crueller, given it has the potential to affect those taking actions whilst they have a limited life expectancy meaning their attention is not focussed on the minutiae of how pensions and inheritance tax interact. Recent court cases are likely to have reduced HMRC’s appetite to pursue IHT where these transfers take place, but the legal position is still that inheritance tax can be applied in limited circumstances. A simple position where a pension transfer could not create an inheritance tax liability should be the aim of the Government.
If this reform is accompanied by the introduction of a flat rate tax charge of between 10% and 20% on all pension assets passed to beneficiaries upon death, we would view this as reasonable. The reform of the taxation of pension death benefits introduced alongside the pensions freedoms in 2015 is seen as being disproportionately generous even by many of those in the pensions profession trying to encourage retirement savings. We believe the Government could increase tax charges in this area without significant opposition.