Simplifying our taxation system may have to wait
Editorial: Do pension issues keep Boris Johnson awake at night? At first instance one suspects the plight of pensioners comes some distance behind gaining power and self-preservation on our presumed next prime minister’s list of priorities.
Nevertheless, the Uxbridge and South Ruislip MP waded into the thorny issue of pensions taxation earlier this month, promising to end the system of disincentives driving experienced doctors out of the National Health Service and into early retirement.
Mr Johnson criticised efforts by HM Treasury to fix the problem, and told The Telegraph the issue was one close to his heart.
A flat rate of tax relief presented as a top-up has serious appeal in terms of its simplicity and incentives for lower and middle-earners, but its proponents have yet to explain how it will work for defined benefit schemes
“It’s obviously wrong, it’s causing a real problem, I have raised it repeatedly with the Treasury and they keep telling me they’ve addressed it but the headlines show it has not been addressed, and we will fix it, we will fix it,” the former foreign secretary and leadership favourite told the paper.
Those who have hoped for reform of pension tax will have been further buoyed by comments in parliament by Liz Truss, a Johnson ally and current chief secretary to the Treasury. She said the new prime minister, almost certain to be Mr Johnson, will have to look at radically simplifying tax systems so that incentives are clear and effective, and that carve-outs for individual industries must be avoided.
Taxation does need changing
If Mr Johnson can keep his word, this intervention must be welcomed. The NHS problem is just one symptom of a sprawling and incoherent taxation system that is difficult enough to understand, much less to navigate without triggering charges given the strictures of some scheme rules.
Alongside the fiendishly complex tapered annual allowance there is the lifetime allowance, which, it can be argued, creates disincentives to saving. The reality in our ageing society is that we should all probably be prepared to pay more tax to keep core services funded, but the Treasury would struggle to deny that it is ‘double-dipping’ by taxing both the input and output of pension saving.
However, there are still reasons to think any resulting reforms may not hit their mark. For one – as several FT colleagues pointed out on social media – Mr Johnson’s comments to the Telegraph confused the tapered annual allowance, the real source of pain for doctors, with the lifetime allowance capping tax-free savings at £1.1m.
While politicians can be forgiven for finding pensions tax confusing, it does raise the prospect of another round of ‘complification’.
Don't hold your breath
There is then the question of what should actually replace the current rules. A move from EET (exemptions on contributions and returns but taxation on withdrawals) to TEE has been on the horizon since George Osborne’s tenure in No.11, but it is not clear how this will add any incentive to save for retirement with an employer rather than into a personal ISA.
A flat rate of tax relief presented as a top-up has serious appeal in terms of its simplicity and incentives for lower and middle-earners, but its proponents have yet to explain how it will work for defined benefit schemes.
Cross-party support will also be crucial, and here is the reason no one should hold out for tax reform any time soon. Mr Johnson’s command of a majority in the House of Commons is anything but certain, and with a likely election either before or after a Brexit outcome is reached, those hoping for tax reform had better not hold their breath.