Tim Dewey: A chance to bring sense to chaos of our tax rules

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THERE were very few people who believed that the Conservative Party would be able to form a majority government after May’s election. Not only has the party prevailed but George Osborne today delivers the first Conservative Budget for almost 20 years.

However there has been little speculation on the need to use the Budget to correct some of the anomalies that have crept into our 17,000-plus pages of tax code during the past five years, often as a result of political expediency over common sense.

Before turning to these anomalies, it is worth noting that Gordon Brown, both as Chancellor and then Prime Minister, “tolerated” a 40 per cent higher rate of income tax (and the increased revenue it was shown to yield) for 12 years. It was only expediency that saw him introduce the 50 per cent rate in his final year, no doubt with the sole objective of setting a political trap for the Conservatives – how could they reduce it without being seen to be pandering to the rich?

George Osborne, from within the coalition and despite a lot of negative publicity, began the work of repealing that policy, reducing the top rate from 50 to 45 per cent. He cited the fact that the top rate was the highest in the G20 group of nations, raised only a third of the revenue anticipated, acted as a disincentive to entrepreneurs and created “massive distortions”. For me, a simpler principle sits behind this thinking, that the State should never appropriate 50 per cent or more of someone else’s efforts.

As such, my challenge to the Chancellor is this: If he genuinely believes the arguments he has made, why is it that taxpayers much further down the income scale continue to be subject to punitive marginal tax rates well beyond even 50 per cent?

The most ludicrous example is when the higher rate of tax starts to apply, at £42,385 and the married couple’s allowance worth £210 per couple is lost. At this point an extra £1 costs the taxpayer £210.

More generally, changes to the way in which child benefit is paid means that some families with two children pay a marginal rate of 60p in the £1 on income between £50,000 and £60,000 as child benefit is clawed back (for some families with four children the marginal rate is over 70 per cent). Similarly, for incomes between £100,000 and £120,000 the marginal rate (including national insurance) becomes 62 per cent as the personal allowance is withdrawn.

Where is the principle in this? Surely a principled Chancellor would address these anomalies ahead of any reduction in the top rate and to higher earners? Or is it more the case of which change garners the greatest headlines?

Returning to the issue of politics over principle, George Osborne attempted to steal Labour’s clothes in promising to reduce the lifetime pension allowance to £1m in the Conservative manifesto (it was £1.8m as recently as 2011). Labour had wanted to use the savings from this to help fund a reduction in tuition fees (ironic and not very principled in itself as it would have benefited high income graduates and have had virtually no impact on low income graduates, as no repayment is required on earnings of £21,000-a-year or less).

Was this a principled stance by Osborne or political mischief?

Certainly the end result is significant uncertainty in an area, long-term savings, which needs one key thing – certainty. And while the figure of £1m is a figure most of us would envy, according to investment firm Fidelity it would yield a £26,000 index-linked retirement income for a couple. Hardly “world cruise” territory and this from a Government that says it doesn’t want to penalise success.

For people who are on money purchase pension schemes (where the risk sits with the individual), the changes are even more pernicious as the fund value can have severe short-term moves depending upon the investment climate. Someone who might have a £1m pension pot one month and stop contributions could find themselves well below that a month later if the Stock Market has a correction.

Meanwhile, because of how the lifetime value is calculated, someone on a much more certain “defined benefit” pension scheme (including most public sector workers) is allowed to receive a pension of up to £50,000-a-year before they are caught out by the lifetime allowance. Where is the principle in that? And what is the penalty for the unfortunate people who exceed the lifetime allowance? A confiscatory 55 per cent tax take on the excess.

No wonder that Paul Johnson, who undertook research for the Institute of Fiscal Studies into this, argued that our tax regime lacked coherence to an extent “approaching chaos”.

Today’s Budget gives George Osborne the opportunity to put principle above politics and address this chaos; one can only hope he will rise to the challenge.

Tim Dewey is chief executive of Keighley-based brewer Timothy Taylor & Co Ltd. He is writing in a personal capacity.