Most people accept that taxes are needed. Roads and healthcare systems don't repair themselves after all.
In two weeks’ time, our blog will focus on the outcomes from the 2026 Budget. The bond markets suggest taxes will have to rise. That might prove to be the case. There is, however, a growing view that the budget will be low key, and an election will be called shortly on the back of that. Tax rises will come down the line, even if they are deferred.
As always, much of the current debate is focused on one question: are taxes too high? It’s a fair question. None of us particularly enjoy handing over more of our money than necessary, especially when living costs continue to stretch household budgets. However, maybe there’s another question worth asking – not how much tax we pay… but how we pay it.
Most people accept that taxes are needed. Roads and healthcare systems don’t repair themselves after all. The bigger challenge is creating a system that feels fair, easy to understand and doesn’t accidentally punish people for doing the right things.
Welcome to the Uk’s world of Tax Cliffs. When offered a pay rise, most of us would expect more money to leave us better off. Yet in some cases, crossing certain income thresholds can mean losing valuable benefits or allowances. The result? You work harder, earn more… and don’t always feel much better off.
It’s one of the quirks of the tax system that regularly catches people by surprise.
We want people to progress in their careers, develop new skills and improve their financial position. Occasionally, however, parts of the system can make that journey feel less rewarding than expected. The effective employee tax rate for earning between £100,000 and £125,000 in the UK is 62.5%, meaning that an employee keeps £9,375 of their income between this banding. If you have children requiring childcare support the outcome is worse, as you lose valuable childcare benefits when any individual in a household earns £1 over £100,000. If you have a child in nursery, you are better off earning £99,999 and claiming the best part of £10,000 of childcare benefits, than if you earn £125,000. How does that make any sense?
As for government policy… let’s see what the next few weeks brings. There is always hope.
In addition, not all income is treated equally. Did you know that employees, self-employed individuals, landlords, business owners and investors can all find themselves facing different tax treatments, even when their overall financial circumstances look broadly similar.
Over time, these differences influence behaviour. People sometimes make decisions based on tax outcomes rather than what would otherwise be best for them personally or commercially. Let’s take our currently stagnant housing market. Stamp Duty has long been an unwelcome guest whenever somebody moves house. Whilst it raises money for the Treasury, it can also discourage perfectly sensible decisions. Some people stay in homes that are now larger than they need because moving is expensive. At the same time, growing families can struggle to find suitable properties in areas where larger homes rarely come onto the market. Add in a Council Tax system based on property values from more than thirty years ago, and it’s easy to see why calls for reform never seem to disappear.
So if it is so obvious, why doesn’t it change? The challenge is that tax reform is a bit like home improvement: everyone likes the idea until the builders arrive and start knocking walls down. Every change creates winners and losers, unintended consequences and costs to change things.
As financial planners, we’re not in the business of predicting budgets or taking political positions. Governments change. Chancellors come and go. Tax rules evolve. What matters to us is helping clients build robust and sustainable financial plans that can withstand whatever the next budget happens to bring. Afterall, the most successful long-term financial plans are rarely built around second guessing government policy, they’re built around much simpler principles, and our advice team will be on hand to guide and implement changes as required to keep client goals on track.
As for government policy… let’s see what the next few weeks brings. There is always hope.
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Our team at Amber River DB Wood includes Chartered financial planners who look after clients across the East Midlands and beyond.
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