The Resolution Foundation has set out radical plans to reform the UK’s tax system between now and 2030, noting that the increase in the quantity of taxation over the past 20 years has not been matched by an increase in its quality.
The think tank said the government tax take has jumped from 33% of GDP during the 2000s and 2010s to 37% today and is forecast to reach 38%, in excess of £1 trillion, by 2027-28.
In its latest white paper, the Resolution Foundation said: “The mismatch between tax-cutting rhetoric and tax-rising reality over the 2010s and 2020s has left no space for a consistent, coherent strategy for the tax system. U-turns and fiscal fudging have been too common and reform side-lined too often. The same taxes have been slashed and then surged, while well-understood problems with our tax system have been reinforced rather than addressed.”
The Foundation said the tax system needs “clear direction of travel”, contributing to a broader strategy of raising growth and lowering inequality.
It has called for the cap on pensions tax-free cash to be lowered and for inheritance tax to be applied to pensions on death.
The think tank also suggested rebalancing the “complicated National Insurance treatment” of pension contributions, recommending that employer NI be extended to employers’ contributions, while introducing NI relief for personal contributions to help lower earners build up their savings.
The paper said: “Tax policy alone was not going to resolve the UK’s low growth and high inequality woes but the design of the tax system should be part of the answer rather than part of the problem.”
It said its recommendations would have a “significant impact” on the UK’s economic potential.
Tom Selby, head of retirement policy at AJ Bell, said: “This is the latest in a long line of think-tank reports backing radical reform of the UK’s tax system. Some of the key proposals, such as drastically lowering the amount of tax-free cash someone is entitled to from the current maximum of £268,275, would likely be unpopular and potentially complex.
“The Resolution Foundation itself acknowledges this, warning there is a risk of any reform to pensions tax-free cash being ‘controversial while raising little short-term revenue’. As such, it seems quite unlikely cutting pension tax-free cash entitlements will be a big priority for anyone bidding to be the next Chancellor ahead of the general election.”
However, Selby warned that the decision by Chancellor Jeremy Hunt to abolish the lifetime allowance and move towards a pounds and pence cap on tax free cash, rather than one linked to the lifetime allowance, could open the door for future cuts – possibly by stealth if the £268,275 tax-free cash maximum figure fails to increase in line with inflation.
“Similarly, subjecting pensions to IHT might raise some much-needed cash for the Treasury’s coffers but could also be a vote-loser, particularly among traditional Conservative voters. It would also likely come with transitional challenges, as those who have contributed to a pension on the basis of the current tax treatment on death might argue applying IHT would, in effect, be a retrospective tax hit on their savings.”
The report also recommended hiking tax rates on both dividends and capital gains. However, Selby said disparities between the rates of tax charged on dividends and capital gains versus income have long been debated in the UK, with the Resolution Foundation backing more consistent taxation of income and wealth.
He added: “This would imply a rise in both the dividend tax rate and CGT, which in turn should make vehicles like pensions and ISAs – which are free from taxes on dividends and capital gains – more attractive.”
