There are key points in life which may prompt a need to engage with the tax system such as; having children, entering work, saving for or drawing a pension, and helping others who need support. The independent Office of Tax Simplification (OTS) has produced a report which highlights how individual’s engaging with HMRC when these key events occur can lead to a range of complexities.
High Income Child Benefit Charge
When income for an individual or their partner is over £50,000 per year, high income child benefit tax charge applies. This tax charge increases until you effectively receive no child benefit when an individual’s income reaches £60,000 per year.
Some people with salaries higher than £50,000 are not claiming the benefit to avoid the need to tax report. This can have an unintended adverse effect on the individual’s national insurance credits which count towards state pension for the parent, as well as delay the child’s receipt of their national insurance number when they turn 16.
These problems can be avoided, by first making a child benefit claim, but then choosing not to receive payment of it. In addition to causing significant administration, the lack of knowledge has caused people to lose out.
Pension Reliefs and Charges
Pensions and associated tax issues are notoriously complex.
Employers have a choice when providing pensions for their employees between what are known as ‘net pay’ and ‘relief at source’ taxation arrangements. The different mechanisms have different outcomes depending on a number of factors, the most significant being for those whose income is below the personal tax allowance.
As part of their report, the OTS has recommended potentially removing or reducing the difference in outcomes, without making it more complex.
Recently the government has reduced the overall level of tax relief available for pension saving, through the annual allowance and the lifetime allowance. This has added to the complexity and, in certain situations, can lead to disproportionate outcomes.
OTS have recommended to HMRC that clearer guidance is needed, along with a constant review of the allowance levels.
Better levels of awareness and education around the tax system would help avoid some of the problems individuals face.
Schools are offered materials through the Tax Facts programme, but resource pressures mean that young people are not introduced to these concepts at an early age, and therefore do not gain the knowledge they need.
The three areas above are just some of those highlighted by the OTS within their report. In conjunction with other tax experts, here at Eldon, we understand how important it is to give you, our clients, the correct advice regarding your individual tax situation, and how that impacts on your overall financial planning.