Child Benefit – increase high income threshold to £100,000 per household
The cost of living in the UK has surged notably since the high-income Child Benefit threshold was created in 2013. The ‘high income cap’ of £50,000 even now ensnares some basic-rate taxpayers and overlooks the impact of inflation over the past decade. Using the Bank of England’s inflation calculator this threshold should be £67,093 today. While increasing the threshold would be a step in the right direction, we should fundamentally reevaluate how household income is considered in the eligibility criteria for Child Benefit to reduce unfairness baked into the system.
A more equitable approach would be to peg the eligibility for full Child Benefit to a household income of £100,000 or lower, rather than focusing on the earnings of a single earner. This change would address the glaring inequity where a dual-income household, with each partner earning just under the £50,000 threshold, can access full Child Benefit, resulting in a combined income of nearly £100,000 without any reduction in benefits. In stark contrast, a single parent earning slightly over £50,000 faces a reduction or total loss of this support after they earn more than £60,000, despite managing on a significantly lower household income.
While this introduces more complexity for HMRC into the Child Benefit system, the benefits of rectifying the current system’s unfairness far outweigh these challenges. This approach would not only eliminate the ‘benefit cliff edge’ effect for single earners just above the current threshold but also ensure the policy more accurately reflects the financial realities of modern families, including dual-income households and the rising costs of childcare.
Such a change would support families equitably and efficiently, encouraging career progression without the fear of losing essential financial assistance and better aligning with the economic and social shifts in family structures.
ISA simplification
In an era where financial literacy and accessibility are becoming more important, the current complexity within the ISA landscape demands urgent simplification. With the imminent regulatory changes in April 2024 set to deliver users the ability to contribute to multiple ISA types in one year, the argument for a streamlined ISA regime has never been more compelling.
The government should go one step further and combine the stocks and shares ISA and cash ISA into a one stop shop for tax efficient saving and investing. People do tend to recognise that they have both long- and short-term monetary goals and being able to help plan for both within one account streamlines the process and could encourage more people to take a step towards investing their money for the future so that it doesn’t stagnate in the apparent safety of cash which is illusory over the long term.
The upcoming changes in April will allow savers to pick and mix ISA types within the same tax year. While this is a step in the right direction, without further simplification of the ISA regime there’s a risk that the benefits of these changes will not be fully realised by the average saver, who may find navigating the expanded options overwhelming. Once again cash is perceived as king and the longer-term benefits of putting money to work in the stock market are lost.
The government and the FCA’s initiative to review the boundary between financial advice and guidance further shines a light on the importance of accessible financial products. This review, aimed at closing the UK’s ‘advice gap’, dovetails with the need for ISA simplification. Offering consumers, a unified, easy-to-understand ISA product that encompasses both saving and investing options could significantly empower individuals to manage their finances more effectively, addressing both the advice gap and the need for financial products that can keep pace with inflation.
Going one step further, the government should look to rename the Lifetime ISA to a “First Home Account,” once again giving what is a muddled product that damages the ISA brand more clarity and purpose for everyday people. This will make the saving landscape more intuitive and aligned with consumers’ goals. The LISA‘s punitive early withdrawal charge should altered so that savers only lose the government bonus, rather than a chunk of their savings, given the need for immediate access to savings is often for reasons beyond their control and because they haven’t fully understood a complex product.
Increase annual IHT gifting exemption to £11,000
In an era marked by a pronounced cost of living crisis that disproportionately affects younger generations, the government needs to re-evaluate the rules surrounding annual gifting allowances. The current threshold, set at a meagre £3,000, severely restricts the ability of individuals to pass on wealth to the next generation without potentially incurring IHT. This limit was established as far back as 1981 and has remained static, failing to adapt to the vast economic changes witnessed over the past four decades.
The gifting allowance should be £11,000 today given inflation. Such a change would not only reflect the economic reality of today’s value of money but also stimulate a more fluid intergenerational transfer of wealth. Given people in their late to mid-50s are now most likely to be the one’s inheriting wealth when they most likely needed it earlier in life, we need to change the system to make it easier to pass wealth down.
To simplify things further, consolidating the various allowances into a single annual relief so that instead of all the idiosyncratic rules around gifting such as the small gifts allowance, wedding gift allowances and the countless of others were just rolled into one easy to understand amount. This would make the often-confusing area of IHT more accessible and encourage more gifting.
This change would not only support individuals in managing their wealth more effectively but also acknowledges the evolving nature of family structures and economic conditions in the 21st century.
IHT simplification
Amidst swaying public opinion, the Conservative government appears to have reconsidered its stance on Inheritance Tax (IHT) abolition. Just a few months ago the rumour mill made it seem an almost certainty that potential cuts or even the complete abolition of IHT were likely at the Autumn Statement. However, since the leaks prior to the last fiscal event it has become evident that such drastic measures might not resonate broadly across the electorate, given that IHT directly impacts only a small fraction of the population. This realisation comes at a crucial time for the Conservatives, as they seek to revitalise their waning popularity.
However, while wholesale abolition looks unlikely, IHT in its current form warrants change to better serve a modern and equitable society. There are several cost-effective reforms that could alleviate the growing pressure IHT places on individuals, without necessitating a complete overhaul of the system.
For example, increasing the nil rate band to £500,000 for individuals and £1 million for married couples would effectively reduce the number of people ensnared by IHT, addressing concerns over its expanding reach given frozen thresholds. Additionally, simplifying the tax by eliminating the residence nil rate band could streamline the process, removing its complexity and its disproportionate benefit to married households—a feature increasingly out of step with contemporary societal norms.
Another avenue for reform is the reduction of the IHT rate itself. Currently set at 40%, a decrease to 30% or even 20% could align IHT more closely with the rates applied to chargeable lifetime transfers. Such a move, combined with a rationalisation of the exemptions available, would not only simplify the tax but also make it more equitable.
JON GREER, HEAD OF RETIREMENT POLICY, QUILTER
The triple lock dilemma
A Labour victory looks like the most likely outcome at the next general election and the party’s commitment to reviewing the pensions and retirement savings framework should hopefully signal a review of whether the triple lock is still fit for purpose. Labour’s “Plan for Financial Services,” is a good opportunity for the party to develop long term policies that sit outside of just political posturing and actually look at the root of whether it is sustainable. This system, which ensures the state pension increases annually by whichever is highest out of CPI inflation, average earnings growth, or a baseline of 2.5%, has been both a protection against poverty in old age and a topic of contention regarding its long-term fiscal sustainability.
There needs to be a balance between protecting today’s pensioners and ensuring fairness for future generations. The challenge, however, lies in Starmer’s potential reluctance to abolish the triple lock, a move that could be perceived as too radical despite its necessity for economic balance. In this light, the establishment of an independent pensions advisory body becomes appealing. Such an entity could offer objective, evidence-based recommendations on the triple lock’s feasibility, navigating the complexities of demographic shifts, economic fluctuations, and intergenerational equity.
Recalling the historical difficulties faced by the now defunct Pension Commission, particularly when encountering the Treasury’s reluctance to cede control, the effectiveness of this proposed body hinges on its authority and the government’s willingness to act on its advice.
One such recommendation from a body like this would be the concept of linking pensions more closely to average earnings. This would represent is a compelling alternative as it would create a more predictable and sustainable pension system. This model not only aligns pension growth with national economic performance but also fosters a fairer distribution of wealth across generations. This approach would mitigate the financial unpredictability associated with the triple lock, creating an easier way to effectively budget and ensure that pension increases do not disproportionately benefit one demographic at the expense of another.
In advocating for a shift towards a system pegged to average earnings, the conversation goes beyond the immediate financial implications to touch on the broader principles of fairness and sustainability. The Labour Party’s impending review, should they win, presents a critical opportunity to reshape the UK’s pension landscape. Yet, the success of any proposed changes will depend on a delicate balance of political will, public consensus, and the adaptability of institutions to implement reforms that honour past commitments while embracing future demands.
RACHAEL GRIFFIN, TAX AND FINANCIAL PLANNING EXPERT, QUILTER
Should we implement a British ISA?
There is nothing inherently wrong with the introduction of a new tax wrapper which offers tax efficiency to people wanting to invest solely in British equities. However, it should not be part of the ISA brand as it complicates something that is already causing issues for consumers. The ISA is a simple idea, a tax efficient place to grow your wealth, however, with various additions over the years it has now become a confusing area of personal finance. Faced with the complexities of this consumers tend to just opt for what they know and that almost always is just a cash ISA. So few people use their total ISA allowance in a given tax year too so the allure of £5,000 more is only appealing to much higher net worth people. The reality is we need to better incentivise the millions languishing in cash ISA accounts to be put to work in the stock market.
Without knowing any detail, questions arise around the mechanics of this allowance—what happens at the point of divestment and the implications of investing in other areas after the initial investment. There are already existing challenges round non-qualifying investments in the ISA regime introducing even more will add more complexity. The new allowance could inadvertently introduce more questions and confusion rather than promoting a culture of saving and investing.
Asset allocation is the largest determinant of returns and therefore restricting choice of investment risks reducing returns. At the same time, the UK stock market is often not particularly UK focused so it is questionable how much it would boost UK plc. Roughly 70% of FTSE 100 company earnings are outside the UK and about 60% of FTSE 250 earnings is overseas. While a flow of capital would be beneficial in the short-term, UK companies still have to deal with the effects of the Brexit deal and the fact the FTSE 100 is made up of some of the most unattractive sectors in the modern world such as oil and tobacco.
This kind of product is not a unique idea. Japan has an ISA (called Tsumitate NISA) that limits investment options to Japanese-domiciled mutual funds. The product is relatively niche in the country, with most people choosing to invest in other NISAs or save elsewhere, but it is growing in adoption and relatively popular amongst younger demographics. This is because it is limited to mutual funds, generally seen as a safer long-term investment and a more convenient option for younger people.
Similarly, Italy has an investment scheme called PIR, which requires minimum of 70% investment into Italian, EU and EEA companies with a permanent presence in Italy. It had significant inflows for the first year, but changes to its regulations caused investors to flee, leading to net outflows since 2019.
Finally, France has an investment scheme called PEA, which requires 75% investment into French companies or companies headquartered in the EU/EEA. It is the most popular investment regime in France, due to favourable tax rates (17.2% as opposed to standard 30% Capital Gains Tax). But while PEA is a popular investment option, France has a significantly lower proportion of individuals with investments in financial instruments than the UK.
We can therefore see that these types of products have varying levels of success in other jurisdictions and while giving a scheme or product of this nature a go in Britain is not necessarily a bad idea it should not be implemented to the detriment of the ISA.
Bringing the Marriage Allowance up to date
The UK’s Marriage Allowance is designed to help couples by allowing one partner to transfer a portion of their personal allowance to the other, if they earn less and the recipient is a basic rate taxpayer. This can save couples up to £252 per year. However, as society and the economy have changed, it’s worth asking if the Marriage Allowance still meets the needs of today’s families as well as it could.
Currently, the Marriage Allowance is limited to couples where the higher earner is a basic rate taxpayer, meaning those who pay tax at a higher rate can’t benefit from it. Given the financial pressures many families face, expanding the allowance to include higher rate taxpayers could help more people especially given wage growth due to inflation and frozen thresholds has pushed many taxpayers into higher tax brackets. This change could make the system feel fairer and more relevant to a broader range of couples.
Additionally, the allowance lets one partner transfer only 10% of their personal allowance. With the cost of living on the rise, increasing this percentage could provide more meaningful support to couples, helping them manage their expenses better. The Marriage Allowance is also often underutilised so making it more meaningful would help more people take advantage of what is a sensible policy but one that needs updating.
Updating the Marriage Allowance to reflect these suggestions could make a significant difference. It could ensure the policy is more in tune with the current economic climate and societal needs, offering a stronger financial support system for couples. This isn’t about making drastic changes but rather adjusting the allowance to be more inclusive and reflective of today’s financial realities, ensuring it continues to serve its purpose effectively.
However, the government could go one step further. The marriage allowance may not suit ‘modern day’ families anymore due to the proliferation of cohabiting. Hunt could take the radical step of scrapping the allowance altogether and instead unfreeze the personal allowance bringing it more up to date.
KAREN NOYE, MORTGAGE EXPERT, QUILTER
The creation of a 99% mortgage scheme
Much like the government’s 95% mortgage guarantee scheme, which is in place until 30 June 2025, a 99% mortgage would give those struggling to save for a deposit a lifeline. First time buyers have had a rough ride over the past few years, house prices have risen considerably, inflation has rapidly eaten away at hard earned savings, and high interest rates have pushed affordability, so taking a first step onto the property ladder has been pushed out of reach for many. A 99% mortgage may provide a solution for some, but there are some serious risks to consider.”
Though a 1% mortgage may appeal to those with little savings to put towards a deposit on their first home, there are some serious risks. Naturally, anything that helps generation rent get on the housing ladder should be applauded but there is a very real concern that if the 99% mortgage scheme were to be put in place, having such a high loan-to-value mortgage would expose buyers to the risks of negative equity. If house prices drop, then only having 1% equity in a property leaves the buyer with a miniscule amount of equity to play with. Given lenders such as Halifax have predicted a 2-4% fall in house prices this year, borrowers taking out such a mortgage could be in negative equity before the year’s end.
Homeowners who find themselves with negative equity will have an uphill struggle if they want to sell their homes. If house prices drop, then a homeowner wanting to sell will not be able to cover the repayment of the outstanding mortgage and moving costs from the proceeds of the sale and would need to then find the difference from their own funds. Similarly, if they are looking to move home, they would need to cover all the negative equity to redeem the existing mortgage, moving costs, and a deposit for the new purchase. This lack of flexibility can have big consequences, particularly for younger buyers, as they are more prone to sudden changes in circumstances, such as needing to relocate for a new job or needing extra space for a growing family.
What’s more, given such a small deposit would be put down, monthly mortgage payments would be considerably higher which could stretch affordability. Interest rates have started to fall to slightly more palatable levels recently, but they remain far higher than the ultra-low interest rates seen in years gone by. This means it may be very difficult to pass lenders’ stringent affordability checks, and if they do then first time buyers would likely face huge monthly costs.
In terms of house prices, the introduction of a 99% mortgage scheme could cause a rush of people looking to buy homes at a time when there is very limited supply. This could push house prices up as prospective buyers compete for homes, only adding to the current issues surrounding supply, demand, and affordability.
So, while the introduction of a 99% mortgage might be well meaning, there could be some serious ramifications if the housing market cools as expected in the coming months and years and potential buyers would need to weigh up the risks of using it at a time when the outlook for the property market is somewhat uncertain. Those looking to take their first step onto the property ladder should seek professional mortgage advice to ensure they are making the best possible choice for their circumstances.
