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Is a ‘tax on age’ the best way to help young voters?

Is a ‘tax on age’ the best way to help young voters?
Chancellor Philip Hammond is going all out in his campaign to get young people onside with a stamp duty cut for first-time buyers being considered for next month’s Budget.
 
Hammond is believed to be eyeing a cut in stamp duty for those trying to get on to the property ladder in a bid to restore ‘intergenerational fairness’, according to the London Evening Standard.
 

Currently, homebuyers have to stump up 2% on property between £125,000 and £250,000, rising to a marginal rate of 5% over £250,0001, then 10% over £925,001, and 12% after £1.5 million.

Those trying to buying a home in London would see the biggest benefit as the average home in the capital rises to £428,546, this means the average stamp duty bill is now a huge £11,427. Even the £2,500 due on a £250,000 property is a large chunk of money considering how difficult it is to scrape a deposit together these days.

While a stamp duty cut would ease the pressure on first-time buyers somewhat, there is a real concern property prices will rise and absorb the saving, meaning they will be no better off. The only way to provide young people with affordable homes is not to tinker around the edges of tax but to build more homes and push prices down.

The mooted stamp duty cut follows reports that Hammond also wants to cut national insurance for young workers paid through a cut to pension tax relief for older workers.

Tax relief, in which the government tops up individual pension contributions to encourage saving, has long been viewed by politicians as a source of potential funding. Tom Selby, senior analyst at investment broker AJ Bell, said the most obvious way for the pension plan to be put in place would be to scrap higher rate relief from a certain age.

Selby modelled two scenarios for cutting higher rate relief for those earning over £45,000: getting rid of the generous relief at age 40 and then at age 50.

A 40-year-old putting £500 a month into a pension – which has investment growth of 4% a year after charges – would have missed out on reliefs of £64,968 by the time they hit 65. A 50-year-old saving the same amount with the same growth rate up to age 65 would miss out on £31,237 in relief.

Although younger people may not have much sympathy with older workers able to save £500 per month, Selby said removing pension tax relief for high earning older employees was effectively a ‘tax on age’.

‘Removing higher rate tax relief is anything but simple when you factor in occupational and defined benefit pensions and how do you justify cutting pensions tax relief for a doctor earning £60,000 in order to provide a tax boost for a City worker earning £500,000?,’ he said.

Gary Smith, a chartered financial planner at Tilney, said implementing a radical change to the pension tax system was difficult to do, as proved by then chancellor George Osborne’s failed attempt in 2014.

He said the key issue was the £50 billion-plus cost of pension tax relief, 70% of which goes to higher rate and additional rate taxpayers.

‘The cost to the Exchequer is unsustainable and will need to be addressed,’ he said. ‘The big question is how you address the tax relief issue.

‘I can only assume that if Hammond does opt to reduce tax relief for older savers to reduce NI for young people, then this would be by reducing the annual allowance – currently £40,000 – for those above a certain age to, for example, £20,000.’

This way older people would be further restricted in the amount of money they can place into a pension and in turn reduce the amount of tax relief available to them.

However, Smith pointed out that young people – at the beginning of their careers and earnings potential – just cannot afford to save much into pensions and may need to save in later years when house purchases and student loans are out of the way.

By cutting relief for older workers, today’s young people could see themselves being restricted from saving into a pension.

‘I do feel that changes to the pension tax relief system are inevitable at some point, but there are other ways to achieve this without penalising older savings,’ said Smith. ‘The introduction of a flat rate of relief for all at 25% or 30% would provide an additional boost to contributions for basic rate taxpayers.’

 

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