There was a great deal of discussion here yesterday about the government's decision to reinstate the winter fuel allowance, with decidedly complicated tax arrangements attached so that those earning more than £35,000 a year would not secure a benefit as a consequence.
If I might summarise the points made, they were:
- This creates a new tax threshold at £35,000 a year, where there was not one before.
- For those in receipt of this benefit because they are pensioners, but who are not entitled to it because their income exceeds this level, there is now a new 100% tax rate to withdraw it.
- To ensure that this tax withdrawal is functioning properly, considerably more people will now be required to submit a tax return than were previously, and all of those additional people will be old age pensioners, potentially with quite complex tax affairs from multiple sources of income, who will as a result either have a significant chance of making errors in their decalrations with a risk of penalties arising as a result, or they will need assistance to do so, quite possibly at a greater cost than the £200 that they will have received as the winter fuel allowance.
- This whole arrangement is considerably complicated because the payment is made per household, and not to an individual, and that interaction also has to be allowed for within the tax system, and that system is not designed to work in that way.
- Whilst in some cases HMRC might be able to adjust for this matter through personal tax codings, this will not be the case if a person has unpredictable sources of income, such as self-employment, rental income, dividends, and maybe arbitrary drawdowns from their pension arrangements that are unpredictable over time.
- However, some very obvious sources of income are excluded, creating considerable prejudice within the system. For example, it seems unlikely that capital gains will be taken into account, and it is highly likely that ISA income will be ignored, which makes no sense when interest received will be, and both provide direct contribution to a taxpayer's well-being in retirement.
All of this is designed to ensure that approximately 3.9 million people will not receive a benefit of, on average, £200 a year. In other words, less than £800 million is involved.
To achieve this goal, substantial effort will be required by HM Revenue & Customs, and very large numbers of people will suffer undue stress with regard to the need to prepare a tax return that they would otherwise not have been required to do.
Because of that risk, there is also a real chance that many who should benefit from this allowance will request that the payment not be made to them, meaning that the purpose of the allowance will be negated because of the onerous nature of the way in which it might be recovered if it is not due.
All of this smacks of a complete and utter mess. The obsession on display is threefold.
First, Rachel Reeves wishes to appear to be prudent, when she is being so at a cost to society at large.
Secondly, the idea that there are deserving and undeserving elderly people is being reinforced. Whether £35,000 is the correct point at which a household moves from being deserving of support to undeserving of it is an interesting point to debate: what is clear is that there is an attempt to divide society around the merits of benefits, which is insidious. Rachael Reeves is explicitly rejecting the idea of universal benefits as a result.
Thirdly, in reality, universal benefits are widely available to the wealthy, and Rachel Reeves appears to have no qualms about this.
Let me take a simple example. This table shows the costs of ISA tax relief, the vast majority of which reliefs do, by definition, go to the wealthiest members of society in the UK, with data on the total number of beneficiaries being misleadingly included to cover all those very small accounts that some people might have, but where the balances are likely to be insignificant:
The cost of this one tax allowance to the wealthy increased by £1.7 billion between 2023/24 and 2024/25. The current slight reduction in interest rates might reduce this cost a little this year, but that is unknown as yet. Capital gains shelter in this way is very unlikely to be reduced, for example. This increase in cost is vastly more than the sum that she is now trying to save on winter fuel allowance payments.
It would seem as if Rachael Reeves is entirely relaxed about this massive subsidy going to those with wealth, and no attempt is made to limit the amount of relief that they get. This is a universal benefit. It is now a well-known fact, often publicised in the press, that there are people who have more than £1 million in ISA accounts, receiving substantial income tax-free as a result, but no action is being taken on this issue at all. The result is that a massive bung is being given to the wealthy, many of whom will also be older, as that is how wealth distribution works.
If Rachael Reeves was really worried about inappropriate tax relief, why doesn't she cap the total amount of income and gains on which ISA protection can be claimed at, say, £5,000 a year? In the current market, and assuming a mix of returns, that might suggest income on around £100,000 of savings might be tax-free. Isn't that sufficient for anyone, when the vast majority of people in the UK have savings that are much less than this in absolute amount?
And, given that almost everyone who might have income in excess of that some will, almost certainly, be submitting a tax return already, the additional cost of this process would be almost nothing.
Meanwhile, everyone in receipt of a winter fuel allowance could have it tax-free, whilst the principle of universality would have been restored, as would that of having a progressive tax system, and almost certainly money would have been raised for the Exchequer, which is Rachael Reeves' obsession.
And the numbers impacted would be very much lower.
Wouldn't this make a lot more sense than the crass arrangements Rachel Reeves has put in place? And wouldn't the result be a lot fairer?
Why can't Labour get things right?
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Because in the main they don’t work in the interests of the people.
They are neoliberal mandarins,, and it’s their turn to rob us.
Just to clarify one point please. As my wife and I are both over 80 years of age, and have individual incomes below £35,000 per annum, does that mean we both receive £150.00?
You should
This is how it worked when the benefit was universal. My husband and I have been retired for a few years, and in the past we would each get a letter around the end of November saying that we would be getting the WFA paid into the bank by some date in December, but as the DWP knew there was another person in the household who was also entitled to it, the amount was halved. Our situation now is that I am entitled but he is not. I am intrigued as to how this will be managed, but I suppose that one way is that we will still get half each, but he will have to pay more tax, as you describe. Despite having several sources of income he has not filed a tax return for a few years as they think they have got it sussed. They haven’t, but as the amounts involved are small (they owe him under £100 for 3 or 4 years) we have not thought it worth the argument. We live in Scotland, where the government has said they will make it up, which all adds to the gaiety.
Good luck!
Labour cannot get things right because they have not the slightest idea what ‘right’ looks like or why it matters.
The winter fuel allowance is, indeed, dog’s dinner.
It highlights the ludicrous nature of “targeted”, “means tested”, benefits. These are a Victorian idea (as in “the deserving and undeserving poor”). Haven’t we got past that by now? They inevitability create anomalies in the tax/benefit system, in this case a £100% marginal tax rate cliff edge at £35k. They risk, in general, creating poverty traps. In this case, as you point out, it is probably relatively easy for some people to get round them.
ISAs are, as you point out, another example of a misfiring benefit.
So too is the tax allowance, paying the wealthy much more that the poor.
As is pension tax relief. As far as I can see the ONLY reason for pension tax relief is to benefit the wealthy. The can pay in with 40% tax and draw out at 20% tax (and use it to manipulate inheritance tax). Basic rate tax payers have no benefit overall. We certainly need to restrict it to basic rate, as you have proposed.
So, with the winter fuel allowance, it should probably be consolidated into the state pension. It was always a ridiculous gimmick. At least, by consolidating it 40% would be taxed back from the wealthy, and it would be a lot simpler and probably cost no more.
In general targeted benefits should be avoided in favour of universal benefits.
Why not abolish tax allowances, ISA tax relief, higher rate pension tax relief, to name but three, and reallocate the tax gains to enable a universal basic income? At least that way the tax system could be arranged to claw this back from the wealthy whilst proving a much more progressive, much fairer, tax/benefit for the many?
Much to agree with
Tim Kent : Why not abolish tax allowances… to enable a universal basic income? At least that way the tax system could be arranged to claw this back from the wealthy whilst proving a much more progressive, much fairer, tax/benefit for the many?
Until they start cutting benefits & privatising services on the basis that people can use their UBI to buy them from the private sector.
UBI was invented by Milton Friedman, under the name negative income tax, as a means of dismantling the welfare state
Universal Basic Income is a neoliberal plot to make you poorer, Dmytri Kleiner, 2016
https://neweconomics.opendemocracy.net/universal-basic-income-is-a-neoliberal-plot-to-make-you-poorer/
It need not be negative, but I have always feared it might be. I also think them technically very difficult.
Thank you for your excellent summary Professor. It sorted my ideas out. I hope the powers that be will take note – one can only hope……
I doubt that the possibility of ISA millionaires occurred to them when they were introduced.
Reeves, of course, was supposed to be considering lowering the annual ISA allowance and wanted people to use stocks and shares ISA’s more. That wouldn’t fix the ISA millionaire issue and would mainly hurt the middling ISA Savers. The old ISA holders could sit on their million pound pots and younger ones would never get the same advantage.
An alternative approach to that would be an upper limit on the total amount that could be held in a cash ISA, to pluck a figure out of air, say, £250k, and have a higher, or no, limit on stocks and shares ISA’s. Give the ISA millionaires a tax year to transfer their money into ordinary saving accounts or a stocks & shares ISA
Easier to say £5,000 income pa is tax free, maximimum, and cap future contributions to £100,000 for those who have notcontributed that much.
I suspect the reason Reeves has done the WFA in the way she has to try and avoid bad press, both the ‘pensioner just above pension credit limit freezes to death’ and ‘ really rich pensioner gets WFA’ stories, kind of government by bad press avoidance.
If the annual ISA allowance is £20000, surely it would take 50 years to build up to £1M or am I missing something.
You are ignoring reinvested. Funds and growth in share based ISAs