If it was up 2 me

Category: Inheritance Tax

  • Reforming Pension Tax Relief for Fairness in the UK

    Reforming Pension Tax Relief for Fairness in the UK

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    A critical look at the current system and proposals for a more balanced approach

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    Tax credits offered on pension contributions are a cornerstone of retirement planning in the UK. The system is designed to incentivise individuals to set aside funds for their later years, with the added benefit of growing these savings in a tax-advantaged environment. While the principle is broadly applauded, the reality of how tax relief is distributed raises important questions of fairness, effectiveness, and sustainability. In this article, I explore the current structure, highlight what I see as its imbalances, and propose a series of reforms aimed at fostering a pension system that is fairer, simpler, and fit for purpose in the 21st century.

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    The Current System: How Tax Credits for Pensions Work

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    For the majority of savers, pension tax relief is granted ‘at source’—meaning that for every £80 a basic rate taxpayer contributes, the government adds £20 to make a total pension contribution of £100. Higher and additional rate taxpayers are entitled to claim back additional relief through their tax return: for a higher rate (40%) taxpayer, the total tax relief climbs to £40 per £100 contributed, and for additional rate payers, even higher.

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    This means that for someone who contributes £600 to their pension fund, and who pays tax at the basic rate (20%), the government tops up their pension by £150, resulting in a total contribution of £750. By contrast, a higher earner can claim a refund that takes their £600 contribution up to £1,000—a £400 uplift, representing 66.6% of their own money, compared to 25% for the basic-rate taxpayer. This reflects the fact that higher earners pay more tax, but also creates a significant disparity in the value of the government’s support.

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    A Question of Fairness

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    This disparity has long been a subject of debate. The current structure means that those who are already well-off receive the largest tax subsidies for saving—an outcome that may seem at odds with the goals of a progressive tax system. While it is true that higher earners contribute more in tax overall, the pension system arguably magnifies their advantage.

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    Consider that a higher-rate taxpayer could receive £400 in tax relief for every £600 they contribute, while a basic-rate taxpayer receives just £150 for the same contribution. Over a working lifetime, this difference is compounded, especially when combined with the power of investment growth and the ability of higher earners to contribute larger sums to their pensions.

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    The Annual Allowance and High Earners

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    Currently, there is a cap—known as the ‘annual allowance’—on the amount that can receive tax relief each year, set at £40,000. If someone were able to contribute the full £40,000, the basic rate tax relief would amount to £8,000, while a higher-rate taxpayer could claim up to £16,000 in relief.

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    Salary sacrifice schemes add further complexity. These arrangements allow both employer and employee to make pension contributions before tax and National Insurance is deducted, resulting in both parties saving on NI contributions. For example, if employer and employee contribute a combined £40,000 via salary sacrifice, there is no income tax, and the employer saves 15% in National Insurance, while the employee saves their own NI contributions. This mechanism, which is especially attractive for high earners, further widens the gap between those at the top and bottom of the earnings ladder in terms of government-supported savings.

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    The Power and Pitfalls of Compounding

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    One of the greatest advantages of starting pension savings early is the impact of compound returns. Money invested in a pension grows not just from the returns on the original investment, but also from reinvested gains over time. This means that the earlier someone starts saving, the larger their pot is likely to be in retirement—even without making larger contributions.

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    However, it is also true that for many people, earnings are lower earlier in their careers, and significant pension contributions become possible only as incomes rise. Thus, it is not merely the mechanics of tax relief, but the interaction between earnings, contributions, and compounding returns that shapes retirement outcomes.

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    Towards a Fairer System: Proposals for Reform

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    Given that pension tax relief is, in effect, a form of public expenditure—costing the Treasury billions each year—there must be reasonable limits. Otherwise, there is a risk that these generous incentives primarily serve those who need them least, while failing to promote adequate pension saving among those on lower or middle incomes.

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    Recognising the imbalances, I propose several reforms to the current system, with the twin aims of encouraging early and sustained pension saving while ensuring that the benefits of government support are more evenly distributed.

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    1. Flat-Rate Tax Relief

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    Rather than linking the rate of pension tax relief to an individual’s marginal income tax rate, I propose a flat rate of 25-30% for all taxpayers. This would mean everyone receives the same percentage uplift on their contributions, making the system simpler and fairer. Basic-rate taxpayers would receive a higher subsidy than they do today, while higher earners would see a reduction, but still benefit from a meaningful incentive to save.

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    • Example: At a 30% flat rate, a £1,000 contribution attracts £300 in tax relief, regardless of income.

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    2. Addressing Salary Sacrifice and Employer Contributions

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    The current system allows significant savings via salary sacrifice, especially for companies and high earners. To address this, I would introduce an employer National Insurance charge of 12.5% on all sums paid into a pension via salary sacrifice. Simultaneously, I propose reducing the general employer NI rate from 15% to 12.5%. This would help to neutralise the cost for employers overall while removing an unintended subsidy favouring the highest earners. This will help simplify the national insurance system and for those who employ lower earners, would encourage job creation.

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    3. Eliminating the £100k “Tax Trap”

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    Currently, individuals lose their tax-free personal allowance on income between £100,000 and £125,140, resulting in an effective marginal tax rate of 60%. I would remove this taper, restoring universal access to the personal allowance and ensuring that everyone is treated the same by the tax system, regardless of their income.

     

    4. Lifetime Cap on Tax-Privileged Pension Benefits

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    I suggest introducing a “lifetime tax relief allowance” for pensions, capped at £300,000 in today’s terms. Over a working life, this would allow an individual to receive up to £300,000 in government-funded tax relief, not an insignificant sum. This is based on a good target of a £1 million pension pot (30% of which would be tax relief), which is more than sufficient for a comfortable retirement for most people. Removing the current lifetime allowance on the pension pot itself would ensure that those who wish to save more can do so, but without further subsidy from the taxpayer.

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    5. Reforming Inheritance Rules for Pensions

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    I propose reinstating the ability to pass up to £1 million of pension wealth to one’s children free of inheritance tax, provided it is used to fund a pension for them. Any pension assets above this amount or not taken as a pension would be taxed at 20% upon death if not taken as a pension. This recognises the contribution of tax relief to the pension’s growth while ensuring a reasonable transfer of wealth.

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    6. Fairness for Families and Partners

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    Upon drawdown, I would allow pensioners to split their income with a spouse or long-term partner, recognising the reality that many partners (often women) take time out from the workforce to raise children or care for relatives, resulting in smaller pensions. The current system does not allow for easy redistribution of pension income within households, despite both partners often contributing equally to family finances.

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    Balancing Generosity with Sustainability

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    It is important to emphasise that pension tax relief is fundamentally a taxpayer-funded benefit. While incentivising pension savings is essential for both individuals and society, the system must not become a vehicle for the wealthy to accumulate disproportionate advantage at public expense. By setting clear and reasonable limits, applying relief at the same rate for everyone, and simplifying the rules, the system can be made more transparent and more inclusive.

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    Conclusion: A Balanced Policy for the Future

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    A reformed system, as outlined above, would preserve the incentive for all individuals to save for their retirement while reducing the disparities that currently favour higher earners. It would also recognise the shared responsibilities of employers, employees, and society as a whole in providing for old age, while ensuring the system remains affordable and sustainable in the long run.

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    In summary, my proposals would:

    • Introduce a flat, universal rate of pension tax relief (25–30%)
    • Remove the £100k tax trap
    • Cap lifetime tax relief at £300,000 per individual
    • Adjust employer National Insurance to prevent salary sacrifice loopholes, while lowering the overall rate
    • Allow fairer inheritance of pension wealth up to £1 million
    • Permit spouses and long-term partners to share pension income upon drawdown

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    These changes would create a pension system that is simpler, fairer, and more equitable—one that rewards early and consistent saving, supports families, and reflects the principles of a modern welfare state.

     

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  • Stamp Duty – Pay on the difference – Rethinking Stamp Duty: Toward a Fairer, More Dynamic Property Market

    Stamp Duty – Pay on the difference – Rethinking Stamp Duty: Toward a Fairer, More Dynamic Property Market

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    Reading another article on how the Government is thinking of reforming Stamp Duty on Housing, I thought I would reiterate comments in a previous post, which think is a good, logical solution to stamp duty that would open up the housing market

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    The Current Stamp Duty Landscape: Barriers to a Free Market

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    Stamp duty has long been a sticking point for homeowners, buyers, and movers across the UK. While intended to generate government revenue, the present regime often acts as a block on the very dynamism needed for a healthy property market. In previous discussions, I highlighted the specific hurdles this tax creates—especially for the older generations, who, if able to move more freely, could release much-needed homes in popular areas for growing families.

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    The rigidity of the current stamp duty regime means that those looking to downsize or relocate, perhaps to quieter, rural areas or simply to homes that better suit their needs, are often dissuaded by the financial penalty of an upfront, often considerable, stamp duty bill. Similarly, the tax can freeze out those who would otherwise consider moving for work or life changes, as they are faced with repeated payments for making necessary moves. Ultimately, this stifles the natural flow of the market, trapping people in homes that may no longer fit their circumstances.

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    The New Proposal: An Ongoing Annual Tax

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    One recently floated proposal suggests replacing the upfront stamp duty with an ongoing annual property charge—specifically, a tax of 0.54% per year applied to the value of any property over £500,000, but only on the amount exceeding that threshold. While this might seem progressive on the surface, it carries its own set of challenges and inequities.

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    For one, this policy would disproportionately impact homeowners in the south of England, and especially in London, where property values regularly exceed the £500,000 mark even for relatively modest homes. By contrast, those in the north—myself included—are far less likely to be affected, simply due to the regional disparities in house prices. While this may seem like a boon for those of us outside the capital, the principle of fair taxation is paramount. A tax should be equitable, not geographically arbitrary.

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    A New Stamp Duty Approach: Tax the Move, Not the Home

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    To address these issues and unlock the property market’s potential, I propose a more dynamic, just, and effective approach: a stamp duty that applies only to the difference between the value of the property you sell and the one you buy.

    • If you “move up the ladder”—buying a more expensive home than the one you’re leaving—you pay stamp duty on the increase.
    • If you move sideways (buying at a similar price) or downsize (buying cheaper), you pay no stamp duty at all.
    • The tax would only kick in for homes over £250,000, helping first-time buyers and those with lower-priced properties avoid the tax entirely.

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    A suggested rate of 5% applied to the difference would, in my view, generate at least as much, if not more, revenue for the government—precisely because it would remove the current chokepoints that suppress transaction volumes.

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    Breaking Down the Benefits

    • Encourages Downsizing: Older homeowners, no longer deterred by hefty stamp duty bills, would be freer to move to homes that suit their changing needs, releasing larger family homes into the market for the next generation.
    • Supports Mobility: Those whose careers require frequent moves would not be unfairly penalised by paying stamp duty multiple times on properties of similar value. Instead, tax would only apply when they actually “trade up.”
    • Boosts Market Fluidity: Removing these artificial blockers would likely increase the number of property transactions, stimulating the market and supporting related industries from removals to renovations.
    • Fairness Across Regions: By taxing only the value gained in a move, rather than the absolute price, the system becomes less vulnerable to regional price disparities. Taxpayers in high-value areas are not automatically penalised, and those in lower-value regions are not left out of the conversation.
    • First-Time Buyer Relief: Setting the threshold at £250,000 protects those entering the market for the first time, while ensuring the focus remains on higher value, higher-impact transactions.

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    Practical Example

    Consider a family moving from a £500,000 house near a school to a £500,000 bungalow in the countryside. Under the current regime, they might pay as much as £15,000 in stamp duty—simply to move from one home of equal value to another. Under my proposal, they would pay nothing, as the change in value is zero. Alternatively, someone buying a second home for £500,000 without selling another property would pay 5% on £250,000 (the amount over the £250,000 threshold), amounting to £12,500.

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    Conclusion: Unlocking the Market for All

    In summary, a stamp duty system based on the difference between what you sell and what you buy offers a fairer, more efficient, and economically sensible solution to the UK’s property tax puzzle. It encourages mobility, supports families at every stage of life, and reduces artificial barriers that clog up the market. Most importantly, it treats taxpayers across regions with greater equity.

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    As the government considers the next phase of property tax reform, I urge policymakers to prioritise approaches that reward movement rather than punish it, ensuring that stamp duty is a catalyst for, rather than a barrier to, a more vibrant and accessible housing market for all.

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  • Should the UK ISA Allowance Be Reduced to Promote Fairness?

    Should the UK ISA Allowance Be Reduced to Promote Fairness?

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    Currently, the ISA allowance is £20,000 per year, that allows someone to save up £20k and the returns from these investments are Tax Free, be it stocks and shares or cash.

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    Approximately 1.8 million of the UK population use the full £20k allowance and most / i would say all are higher tax earners. The reason i say this is that i do not believe anyone earning under £50 per year could save £20k per year, i.e 50 % of their total take home pay.

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    This allowance therefore, disproportionately benefits the wealthy as most people do not have that level of disposable income to save £20k per year. The figures show that the majority of those with ISA’s save less that 5k per year, according to AJBell.

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    The result of this policy is that the rich get richer but only as a consequence of they having money, they do not earn this extra benefit.

    So what I would do

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    I would reduce the allowance £10k. This would result in approximately 1.8 billion of investments being outside the ISA envelope per year generating £0.72 Bn of tax in the first year. For each subsequent years it would increase by 0.72 Bn so after 5 years, it would be producing £3.6 Bn of revenue. This does not include the added value associated with compounding and those on 45% tax.

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    This would only affect less than 5% of the population.

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    I am not for taxing the wealthy for the sake of it, but I think the tax system should be fair across the board. With this situation, I think the ISA rate disproportionately benefits the wealthy.

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    I would also limit the value able to be held in an ISA.

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    Did you know that:-

    There are nearly 5,000 ISA millionaires in the UK, according to recent government data. This number has been steadily increasing, with a near 10-fold increase since 2016. The number of ISA millionaires has risen significantly in recent years, with a substantial increase from 450 in 2016 to nearly 5,000 today. 

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    The average ISA millionaire has a portfolio worth around £1.4 million, according to Aberdeen Group plc. 

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    The top 25 ISA investors hold an average of nearly £9 million each.  This means that these individuals receive over £0.5million per year tax free!!

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    So what i would do here is limit the value of ISA initially to a maximum of £1m. Whilst this would increase revenue by a relative modest amount in terms of government taxation, £50m, it would be a fair way to raise taxes on unearned income.

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    I would also have an allowance of ISA that you can pass over to your children that is not subject to inheritance Tax. That will be dealt with separately when I cover inheritance tax, in particular with the inclusion of your pension pot inheritance tax calculations from 2027, which i think is totally unfair.

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