Summer Budget: savings and tax

Saving is not just for a rainy day

Alison FlemingWhile not as radical as the Chancellor made it out to be, unfettered by coalition shackles, George Osborne was able to give Scotland’s baby boomers and pensioners a couple of tax sweeteners for their afternoon tea.

Proclaimed as a ‘budget for working people’ that would transform the UK from “a low wage, high tax, high welfare economy; to a higher wage, lower tax, lower welfare country”, today’s speech was designed to reward those who go out to work while restricting welfare for those able to work but who have become reliant on the welfare system.

Many lower paid taxpayers will be pleased with the slightly increased minimum wage, now rebranded as the ‘living wage’, alongside an increase in the starting point for those paying income tax from £10,600 to £11,000 in 2017. And at the other end, there was also a £615 rise in the higher rate threshold to £43,000. Working families will also welcome the increase of free childcare from the current 15 hours per week to 30 hours per week from 2017.

However, the lack of substantial movement in the NIC lower earnings limit will leave many of the poorest employees outside of the income tax system but still liable for NIC.

Motorists were rewarded with confirmation of a continued freeze in fuel duty and a reform of road tax designed to make the system fairer, particularly for those with second hand cars.

Pensions meanwhile, which have dominated many of the coalition budgets over the last five years, saw further changes with some already well-trailed amendments on high earners tax relief for example as well as signposting some potentially transformational future changes.

Plans by the UK Government to review how pensions are taxed in future will undoubtedly be welcomed. Any subsequent overhauling of the system will ideally go some way towards rebuilding trust and addressing the fairness of tax relief for those members earning defined contribution versus defined benefit pensions.

The proposal to restrict tax relief for those earning more than £150,000, does in the meantime however  introduce significant complexity and will be difficult for companies and individuals to understand. A similar system was proposed by the then Labour government in 2009 and was scrapped by the Chancellor in 2010.

This change will make pension savings largely unattractive for senior employees – potentially disengaging business leaders from the role of pensions in their organisations. Whether the tax revenues expected from this change materialise remains to be seen as companies and individuals review their approach to reward and savings.

Perhaps it would have been better for the Government to hold its nerve until the more wide-ranging review of the pensions’ tax system could be considered.

Saving was also in the spotlight, and while it’s great to see a renewed focus on promoting a savings culture across the UK, pensions and ISAs should be kept separate. Not only do they have very different goals – saving for old age versus earlier life events – but they could confuse people and as a result put them in a vulnerable position when they reach retirement age.

Consumers want both options and many currently have this through their employer’s benefits programmes. Perhaps the tax advantage can be switchable, but funds need to remain separate.

Alison Fleming is a pensions partner at PwC in Scotland

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