This report from the independent Office of Tax Simplification examines, for the first time, a range of complexities that can affect people’s experience of engaging with the tax system at key points in their lives.
The report makes 15 recommendations to help tackle complex tax issues that can arise in relation to events such as having children, entering work, saving for or drawing a pension, and helping others who need support.
Bill Dodwell, OTS Tax Director, said:
The recommendations in this report are focused on areas we consider are of the most practical concern to people. For many people, their tax is usually dealt with under the PAYE system, so it is only when something significant changes in their lives that they need to think actively about tax. So it’s all the more important to make it as easy as possible to get things right and to understand any choices that are to be made, and the consequences of these.
Kathryn Cearns, OBE, OTS Chairman said:
This report focuses on individuals’ experience of the tax system at significant points in their lives, complementing a previous OTS report on simplifying everyday tax for smaller businesses. The OTS’s recommendations offer a range of ways in which the tax system can be improved for everyone.
Three areas to highlight are:
The High Income Child Benefit Charge
Where an individual or their partner receives child benefit and one of them has income over £50,000 a year, the high income child benefit tax charge applies. It claws back a proportion of the child benefit, rising to the full amount if the person’s income is over £60,000.
Some people avoid the complexities of tax reporting by not claiming child benefit. However, this can mean they lose out on national insurance credits towards the state pension, and their son or daughter will not automatically receive a national insurance number as they turn 16, which can mean they won’t pay the right amount of tax until they are able to arrange to get one.
These problems can be sidestepped, as guidance points out, by first making a child benefit claim, but then choosing not to receive payment of it.
Bill Dodwell said:
This is inherently confusing - and people can still lose out. The OTS recommends that the government reviews the administrative arrangements involved to improve the situation - and also looks at the position of those who have lost out since 2013.
Pension reliefs and Pension charges
Pensions are one of the most complicated subjects for individuals to understand - both because pensions themselves are complicated and additionally the tax issues are not straightforward. The report highlights a number of pensions’ issues.
Employers have a choice when providing pensions for their employees between what are known as ‘net pay’ and ‘relief at source’ arrangements. Unfortunately, the different mechanisms involved mean that people whose income is below the personal allowance are not as well off overall if their employer uses a net pay scheme rather than a relief at source scheme.
The OTS recommends that the government should consider the potential for removing or reducing this difference in outcomes, but without making it more complex for those affected.
In recent years the government has reduced the overall level of tax relief available for pension saving, in particular through the annual allowance and lifetime allowances. The way these work is complex and, in certain situations, can lead to disproportionate outcomes.
The OTS recommends that HMRC ensure clear guidance on the tax issues is available, and that the government continue to review the allowances taking account of the distortions they sometimes produce.
Some of the problems individuals face in interacting with the tax system could be helped considerably with better levels of tax education and awareness. HMRC has some good materials for schools through its Tax Facts programme, but pressure on the curriculum, as well as finding people to teach them at relevant times, mean that many young people don’t gain the knowledge they need.
Bill Dodwell said:
Everyone involved - in schools and in further and higher education, employers, tax advisers and HMRC - needs to work together to help improve overall awareness and understanding. The OTS encourages HMRC to continue and expand its work in this area and involve a much wider group of organisations.
Notes for editors
The Office of Tax Simplification (OTS) is the independent adviser to government on simplifying the UK tax system, to make it easier for the taxpayer. The OTS makes recommendations for the government to consider. It does not implement changes - these are a matter for government and for parliament.
As well as the three areas highlighted above, the report also comments on the operation of PAYE and how individuals can help others with their tax affairs:
The operation of PAYE
When starting work, changing jobs, claiming work-related expenses, first drawing a pension, or having multiple jobs or pensions, a range of practical issues can arise to disrupt the smooth operation of the PAYE system. Individuals often find tax codes confusing and can find that the system take a long time to catch up with changes.
The OTS recommends that consideration of these and related issues are incorporated into HMRC’s ongoing work to improve the operation of the PAYE system. This compliments a call in the OTS’s report on Simplifying everyday tax for smaller businesses for a new review of PAYE to look at how inputs are processed and feed into tax codes and personal accounts.
Many people need, or choose to get, help dealing with their tax affairs, including when their health or other personal circumstances mean this is helpful or necessary.
Such help can, for example, be facilitated by the use of lasting powers of attorney, a tax agent or by someone using HMRC’s ‘trusted helper’ arrangements. However, the guidance on these different approaches is not integrated and, in particular, does not cover how those with lasting powers of attorney can most easily register that fact with HMRC.
The OTS recommends that HMRC integrate and improve its guidance in this area.
Press enquiries only please contact Julie Gillespie, OTS Press Officer 03000 585028