Simplified products need a simplified tax regime
Filed under: Tax
For those that don't know the government put together a group, headed by ex-Lloyds head of risk Carol Sergeant, to develop a suite of simple products that everyone should have.
Need to know: Savings
In time the group also suggested developing a simple income replacement insurance policy that will pay out should you become too ill to work or unemployed.
This is a great idea, although it may seem like reinventing the wheel the products which providers sell as 'simple' will have to fill set criteria on terms and charges – this will make products more comparable and easier to understand.
The report is now up for consultation and we'll know the outcome next year.
I think the Treasury should try to extend this idea of simplicity through products and into the tax system. People are put off from saving because of complexity and they're equally put off efficient tax planning because it's so difficult.
According to research each taxpayer will giveaway £421 to the taxman this year by failing to claim tax credits and use allowances. The biggest waste is on tax credits - £7.26 billion worth were not claimed last year.
This includes child tax credits, working tax credits and pension credits. I can vouch for the fact that child and working tax credits are almost impossible to fathom as I am in the process of helping my sister, who is returning to work after having a child, to fill out the forms.
The second biggest waste is in pension credits, a phenomenally complex system where 40% higher-rate taxpayers have to claim back 20% tax relief through self-assessment.
Even trying to figure out if you need to claim the 20% is hard; employers normally claim the full 40% for you unless you're in a group personal pension (which sounds like a group pension but isn't) and you have to claim the 20% back yourself.
If you pension is private you're on your own all the way.
No wonder people don't bother to save. Simple products are a great idea, but to inspire people to engage with savings we need simple products to be backed up by a simple tax system.