Income Tax is very variable

 

            Amidst all the discussions about tax avoidance and evasion there has been little consideration of tax complexity.

             Given the relatively high levels of UK taxation today, there is a perpetual tussle between the government, wanting to collect more, and most people and companies, wanting to pay less. The government makes this tussle more likely, because some of the time it is urging people to take advantage of tax breaks or allowances to affect their conduct, whilst at other times complaining when they do so succcessfully.

              Governments uses the Income Tax system to send a variety of messages about conduct. The government would like us to save more, particularly if that enables us to lend money to the government itself. Some National Savings products are free of Income Tax and CGT. Dividend income is taxed at a lower rate than other income, encouraging people to invest in businesses. People prepared to start up and run their own businesses can gain various entrepreneur’s tax advantages. Venture Capital trusts are free of income tax and  capital gains tax on their investments to encourage investment in smaller and newer ventures if you meet qualifying conditions.

             I am not a tax expert and am not seeking to provide tax advice. Please do not rely on anything on this site when considering your own tax position. In general terms,   if people save through their pension plan they can put away up to £50,000 a year tax free if they earn at least £50,000. If they invest in venture capital trusts or through the Enterprise Investment Scheme they may get a tax break of 30% of the income invested. The limits are £200,000 on VCTs and £1m on EIS. If people give to charity the gift can be offset against their highest tax rate. If people save £11,280 this year they can put  that in a tax free ISA, with up to £5640 of that  in cash.  The Income tax rate on savings is reduced to 10%  up to £2710 in savings income. The personal allowance is £8105, but £10,500 if you are over 65. If , however, your income is over  £25,400 your personal allowance is progressively reduced.  The rate of tax on dividends for a 20% rate payer is just 10%.

              The system is now riddled with twists and turns in an effort to stop people finding ways round the system, and with all sorts of allowances and reliefs to encourage people to save, to invest and as a reward if you are older.

                 The government claims to run a “progressive” Income Tax system. Recent changes have made it a kinky kind of progressive. 40% tax cuts in at a relatively  low level of income now, at £34,370. At £100,000 people have to pay 60% tax over a £16,210  income range, as they progressively lose their Income Tax personal allowance. Beyond £116,210 they  resume the 40% rate, until the 50% rate cuts in at £150,000. The withdrawal of the Age Allowance can also create higher rates of Income Tax than the standard 20% at lower income levels above £25,400.

              This all begins to look too clever by half, and full of complexities which lead to people on similar incomes paying very different rates of tax quite legally. Consider these  cases:

Mr A   has retired with a combined pension of £ 42,000 a year. He also has an income of £25,000 tax free from saving over his lifetime in tax free national savings bonds, and a VCT dividend income also tax free  of £5000.  He pays  £6779  tax on his income of £72,000 a year, or a tax rate of 9.4%

Mr B also earns £72,000 a year. He has a young family and a mortgage. All his money comes from his main employer. He pays £18684 on his income, or 26%.

If Mr C earns  £116,210 with no offsets, he will pay a sharply higher rate again owing to the withdrawal of the entire Personal Allowance.

Of course Mr B and Mr C could save for a pension, put some money into tax saving schemes  and take other measures to get their tax rate down, if they have spare income to save. They would not have gains in their spending power as  a result. Mr A has been smart and prudent over his life, and is reaping the rewards from playing the Income Tax game successfully.

Is this a great system? Or could we move to lower rates for all, with fewer offsets?  What would the incentive effect of that be? We could do so whilst preserving the benefits for those who have made long term decisions already based on the present system. I am not recommending making Mr A pay more tax.

I would also add that some of you have written in to say rich people living in  the UK can use trusts to avoid tax. If someone sets up a bare trust the beneficiary pays full Income Tax and Capital Gains on the benefits as the property in the trust is treated as his own. For most more complex trusts the Trustees have to pay 50% tax on most of the income and the 42.5% top rate on dividends on divident receipts, with the beneficiary getting the relevant tax credit to avoid double taxation. Most trusts are not a route to avoid UK taxes for a UK taxpayer.

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196 Comments

  1. Gary
    Posted September 11, 2012 at 5:10 am | Permalink

    What do you get when govt tries to do the impossible and manage the economy? You get a tax code with 14000 pages of mumbo jumbo.

    • Jerry
      Posted September 11, 2012 at 8:19 am | Permalink

      Gary: That has nothing to do with them managing the economy, 14000 pages of mumbo jumbo is just the result of an inefficient Treasury coupled to a wish to confuse the average person into accepting what ever HMRC says.

      In the 1960s we probably had the most managed economy, out if interest, how many pages were there to the tax code back then?

      • uanime5
        Posted September 12, 2012 at 4:12 pm | Permalink

        You’re forgetting about the constant demand by businesses for tax exemptions and changes to prevent businesses abusing tax avoidance. This is why the tax system has become far more complex.

        • Jerry
          Posted September 13, 2012 at 5:48 am | Permalink

          @uanime5: No it is not, and in any case there is more than enough evidence to suggest that a complex tax system causes tax avoidance and even evasion as people try ever harder to keep their earnings. there is enough evidence to show that both avoidance and evasion dropped during the 1980s. One of the reasons, but not the only, why the tax system is to complex is because it has grown like Topsy but the main reason is that it suits both the HMRC and the Civil Service who run it.

    • Disaffected
      Posted September 11, 2012 at 8:28 am | Permalink

      Mr Redwood, your blog is misleading. The government does not want people to save. The current policies do not give any incentive to save. In fact one member of the BoE committee (deputy governor) urged savers to spend to help the economy. All economic plans are geared towards helping the government borrow huge amounts of money that we taxpayers have to pay back- and our children and their children and their children. Also NI can not be excluded from the tax an individual pays, especially if a PAYE employee, it is in addition to the amounts you state. The state takes more than the person earns in a lot of cases.

      I do accept the tax legislation is a mess because government has continually tried to disguise how it adds tax to every part of our lives in an attempt to reduce the amount of income tax taken from the pay packet. Normal political deceit. It is also clear that we all pay too much tax for left wing socialist ideology and EU regulation, laws and bureaucracy in an attempt to make all the EU countries fit into an EU super state. If only we had a Tory leader with a Tory government. Cameron makes Gordon Brown appear like an economic genius. After all he is still carrying on with spend and waste plans.

      • Jerry
        Posted September 12, 2012 at 7:04 am | Permalink

        @ Disaffected: TBF the government is probably sending out mixed messages here, yes they (through the BoE) want us to spend, spend, spend (what we can) but they also what us to save for our old age pension needs, just because the base interest rate is absurdly low for savers doesn’t change the fact that people should be saving, even cash in the “zip-up mattress” -although that is probably the most secure or effective method- is better than nothing.

        • Jerry
          Posted September 12, 2012 at 9:57 am | Permalink

          Oops, …although that is probably not most secure or effective method…

      • AlexW
        Posted September 12, 2012 at 9:30 am | Permalink

        Mr Redwood, your analysis omits NI and employers’ NI. Ed Balls ended the distinction between income tax revenue and NI payments (there is now no NI “fund” of segregated monies). It is therefore absurd to arbitrarily differentiate between these taxes on income.

        Including NI the effective tax rates in your examples become:
        Mr A pays 9.4%
        Mr B pays 40%
        Mr C pays 46%

        The first step to untangling taxation is to merge these income taxes into one. The next step is to introduce a single universal tax rate for all income above the breadline.

        The objective of taxation policy should be to maximise long-run tax revenue. This means optimising the nature and level of taxation for growth. A recent meta study of the academic literature suggested that the revenue maximising rate for taxes borne in the economy is unlikey to be above 35% of GDP.

        The Conservatives should make the argument that this is the best way to maximise the tax take in a way that the economy can sustain.

    • Leslie Singleton
      Posted September 11, 2012 at 4:12 pm | Permalink

      I am still trying to work out (not that I care much what this lot think) whether the government is trying to get us to save or spend. I think, though I am not sure, that these are opposites so you might think it should be clearer.

  2. Single Acts
    Posted September 11, 2012 at 5:17 am | Permalink

    So you are saying Mr Brown made the tax system madly complex and Mr O is yet to significantly address said complexity?

    Not a reason to vote Lib, Lab or Con then.

    • Timaction
      Posted September 11, 2012 at 6:41 am | Permalink

      I think we all know the complexities of the tax system but what we need is a radical and “honest” overhaul of a draconian system. Tax should be considered an evil and need to be justified everytime a politician sneaks through yet another unjustified tax. Just remember all the stealth taxes that underhanded Brown put through. It became a national joke. Why shouldn’t we try to avoid this draconian tax raising dictatorship? Its time to have a straight forward simplified tax system not the VAT, air passenger duty, insurance tax, national insurance tax etc etc.
      Its time for a complete overhaul of the public services to reduce our need for such tax largesse including an independent review of all levels of politicians in this country and their need. Do we really need EU, Parliament, national assemblies, mayors, county, town and village councillors all paid by the tax payers teet? An independent review of their pay, expenses and pensions is well overdue. Why do politicians still get RPI instead of their preferred measure of CPI for their pensions?

      • Lord Blagger
        Posted September 11, 2012 at 8:22 am | Permalink

        How about giving the voter the say on finance bills? It’s called democracy.

        So if John Redwood wants to raise taxes, he has to get us to disagree.

        If Vince Cable wants his Richard Branson tax, so he can get his hands on Branson’s wealth, he has to get us to agree.

        • Jerry
          Posted September 12, 2012 at 7:12 am | Permalink

          @Blagger: Why not just have a general election each and every year, the manifestos being the parties finance bills (Budget), after all it is generally accepted that if a government can’t get their Budget through parliament (as would be the case if it failed your referendum democracy test)?

          Unworkable, I here many shout…

      • Jose
        Posted September 11, 2012 at 10:51 am | Permalink

        I’m under the impression that the Treasury employs modelling techniques to help understand the possible outcomes of changes to tax regimes.

        What is so difficult about using similar techniques to model the effect of a simplified coding system, flat rates etc.?

        They probably already know the answers but won’t admit it as it would put half the Revenue department out of work!

        • Bob
          Posted September 11, 2012 at 4:30 pm | Permalink

          @Jose
          The effect on the payroll vote is probably part of the mathematical model.

          When you run the model it returns the result:
          – Budget in surplus
          – 100,000 tax inspectors redundant
          and they and their dependants are not happy
          because their skills are no longer in demand

          • Posted September 12, 2012 at 5:34 am | Permalink

            Surely not 100000 of them are there – and still they cannot answer the phone or give sensible answers to questions.

      • Patrick Loaring
        Posted September 11, 2012 at 1:21 pm | Permalink

        Timaction states; “and village councillors all paid by the tax payers teet? ”

        Parish Councillors in my area are not paid anything by the taxpayer. I’m not aware that there are any “attendance” payments to councillors at the parish council level. However, I am aware that attendence allowances are paid at district councils and upwards.

    • forthurst
      Posted September 11, 2012 at 11:15 am | Permalink

      This is the Gordon Brown continuity government. The compliance and avoidance industries which feast off peoples’ fear and fatigue at the prospect of the arbitrary complexity of the earnings confiscation system is the middle class equivalent of paying workmen to dig holes and fill them in; the level of added value generated is precisely the same. Whole industries exist in finance, employing skilled professionals, predicated on the arbitrary rules constructed to encourage us save some of the diminishing purchasing powers of our incomes whilst the government wastes more and more for which further confiscations inevitably will be mandated.

      This is not so much the government of ‘posh boys’ but the ineffectual posturings of slimey and un-English individuals who are making no effort to return this country to growth from wealth creation (not syphoning off) and don’t much care anyhow so long as they believe they can hoodwink us with PR.

  3. Posted September 11, 2012 at 5:23 am | Permalink

    Indeed it is an absurd system flat rate 20% would be far better in the long run.

    The £50K “tax free” into a pension is only a deferral, you pay tax on the way out and you cannot reclaim dividend tax in the fund – thought you can get 25% tax free on retirement. It works best for people paying 40% tax and only likely to be paying 20% when retired otherwise it is hardly worth the costs and negatives of having to buy a duff annuity later and running costs.

    The EIS and Seed EIS provided better routes, if you can find a good honest one or set one up yourself. The problem is the 30% rule forces you to do it with four others or be a minority shareholder and guarantee of return are not allowed and trades restricted. Also you tend to be putting all your eggs in one basket or business.

    Trusts as you say are now very heavily taxed but it is still used as abuse by the ignorant lefties pushing their politics of envy but now knowing the facts as usual.

    • Posted September 11, 2012 at 5:36 am | Permalink

      What the government need to do is just to waste less and do less. Money left with individuals will be far better used, in general, and will generate taxes anyway as it is spent or invested.
      Fire the half of the state sector that do nothing useful, stop the gifts to the EU and the pigis, stop all the green tosh and get taxes down. Income tax down to 20% and perhaps just get rid of pension relief there is not much benefit in them for most in practice.

      After all we have the legacy of the Olympics (the £10Billion debt) to pay off and some white elephant building.

      The government seems to think too that it will save the NHS money if more do sport as it will tackle obesity. In fact sport injuries are a major cost to the NHS. As are worn out hips, knees and the like. I will just eat a bit less and stick to a gentle walk or two I think and a bit of table tennis. All the statistical evidence shows sports people live less long lives in general it seems. Not to mention all the horse and bike accidents.

      • Lord Blagger
        Posted September 11, 2012 at 8:24 am | Permalink

        The NHS is the biggest cost to the NHS.

        They kill over 20,000 a year.

        They even admitted the other day that the lack of standard charts was killing6,000 a year.

        • Posted September 11, 2012 at 9:37 pm | Permalink

          Indeed the NHS is in desperate need of some reform politics, free at the point or rationing, the drug companies and professions on the make, this is certainly not in the patients interests very often.

      • Disaffected
        Posted September 11, 2012 at 8:30 am | Permalink

        The US has a good progressive income tax system that we ought to follow. People in the US would not tolerate our taxation even under the socialist Obama- no friend of the UK.

        • uanime5
          Posted September 12, 2012 at 4:18 pm | Permalink

          The USA’s tax rate isn’t progressive because it’s dependent on federal, state, and city taxes. So two employees earning the same amount in the same state can pay different rates of tax.

      • Max Dunbar
        Posted September 11, 2012 at 6:09 pm | Permalink

        “Fire half of the state sector”.

        Are you not being too kind? The teaching “profession”, for example, needs a clean-out in the order of 90% and that’s the figure from the deputy-head of a state primary school in Scotland, not plucked from the air.

        The “teachers” are spoiling for a fight with the government at present. That means the usual pantomime of street demos and behaving like small children. Sack the whole lot and they can re-apply for their jobs.

        • Electro-Kevin
          Posted September 12, 2012 at 7:47 am | Permalink

          Max – That isn’t my experience of teachers, some of whom are part of my social peer group.

          They’re just ordinary folk trying to do a job in difficult circumstances – a disruptive minority of children backed by aggressive parents and a system which does not back them up.

          Like me most belong to a union for the legal support and not for political reasons. (Political fund donations are optional)

          • Max Dunbar
            Posted September 12, 2012 at 10:40 pm | Permalink

            Most teachers bin the union journal without bothering to read it and take the same line as you do on politics – its for others to get involved with. That is why the far left dominate the teaching unions.
            “Ordinary folk trying to do a job”? I thought that teaching was a vocation not a mere job. How naive of me. The best teachers are not “ordinary”.
            And who created the “system”?

        • uanime5
          Posted September 12, 2012 at 4:19 pm | Permalink

          So believe that firing 9 out of 10 teachers and having class sizes of 300 will improve education. Clearly you’ve never tried to teach.

          • Max Dunbar
            Posted September 12, 2012 at 10:54 pm | Permalink

            Observing the sad procession of mainly dull and untalented teachers who bored me and others rigid over a period of some 13 years I think I am entitled to pass some comment.
            Class size at my primary school was in the region of 42 and absolute discipline was maintained by the old dragon who taught us in P4. Unpleasant but effective teaching. Secondary school was largely wasted time and money due to hopeless teaching.

      • zorro
        Posted September 11, 2012 at 7:34 pm | Permalink

        Indeed sports injuries are a bit of a downer especially when you get a complete rupture of the achilles (3 months in plaster) like I had over 10 years ago. I tend to engage in long walks now but still get the odd twinge. My wife and I have a rule that we plat table tennis wherever we go on holiday. A good game and not expensive to buy equipment for. I am missing my cricket though…..

        zorro

        • zorro
          Posted September 11, 2012 at 7:36 pm | Permalink

          And what does that have to do with income tax?….very little apart from the fact that often the simplest regimes are often the most effective at keeping you healthy and fit both physically and financially.

          zorro

          • Posted September 12, 2012 at 5:38 am | Permalink

            If you spend £9Billion on a jumped up sports day you much need more income tax revenues. That is the connection and I did not believe all the saving the NHS claims due to less obesity that were being made either.

  4. Brian Taylor
    Posted September 11, 2012 at 5:27 am | Permalink

    Stop the 40% tax payers claiming this higher amount that tax payers contribute to these pensions,to offset some of this raise the 40%tax threshold,this will stop the gap between rich and poor.

    • A different Simon
      Posted September 11, 2012 at 6:54 am | Permalink

      Does your proposed scrapping of tax relief at 40% on the way in only apply to people who only have defined benefit money purchase schemes ?

      How are you going to calculate the value of a defined benefit pension and tax those lucky people accordingly or are they going to be exempt from this increase ?

      Surely the answer is two stage :-
      – a livable state pension through larger deductions from wages so vocational pensions become secondary and the icing on the cake but not essential .
      – replacement of existing public sector pensions schemes with a scheme which is open to everyone .

      • A different Simon
        Posted September 11, 2012 at 6:57 am | Permalink

        Typo : Does your proposed scrapping of tax relief at 40% on the way in only apply to people who only have defined CONTRIBUTION money purchase schemes ?

        • Lord Blagger
          Posted September 11, 2012 at 8:24 am | Permalink

          Quite. Notice that since the civil servants have no fund, how can they be taxed on it.

          yet another scam

          • sm
            Posted September 11, 2012 at 11:09 pm | Permalink

            Re: Non funded schemes
            You impute the tax…you estimate it based on the sum needed to fund the promise! My gosh they would not love that!

            Being taxed on a politicians promise.. that just might wake them up to the ponzi.

    • Mark W
      Posted September 11, 2012 at 11:38 am | Permalink

      Restrict the 40% allowance? Why? How much tax subsidy do public sector pensions schemes get? Unlimited as no private provider would give those kinds of guarantee now.

      If the 40% allowance went, I would simply not bother paying in. I’d take it now and just pay the tax. I think I’d not be alone, and I think the pension providers know this and possibly a few chaps knocking around in the civil service are aware of the crisis that would follow such an absurd attack on private sector pensions.

      Saving tax payers money regarding pensions should be focused on public sector pensions. When they are brought down to our level of equilivant fund value for contributions ratio, and left with the annuity route as opposed to governement coffers, then perhaps a glance at the 40% figure is nearer worthy of consideration.

      • uanime5
        Posted September 11, 2012 at 7:03 pm | Permalink

        So you want a race to the bottom on public sector pensions, rather than private sector pensions to be raised. I guess that’s what happens when you use the politics of envy to make decisions.

        • Mark W
          Posted September 11, 2012 at 10:15 pm | Permalink

          No, I’m not looking for a race to the bottom. My response was simply regarding calls for ending the 40% allowance.

          When Gordon Brown taxed dividends in pensions for the already lower private sector pensions, I seem to remember public sector unions saying absolutely nothing about how unfair that was. So long as their burden on tax payers was left in place they keep quiet.

        • Jerry
          Posted September 12, 2012 at 7:57 am | Permalink

          @uanime5: Not envy, just parity. Why should the public sector have a better pension provision simply because it is paid by the private sector, rather than through their own earnings – remember that the public sector has no money of its own, only what the private sector gives via income and other taxes. Private sector pensions have found market equilibrium, income and outgoings will balance [1] – why are so many public pensions in deficit, why are so many going to need to bailed out one way or another in a few years time?

          [1] yes I know that there has been some spectacular private pension scheme failings but these mostly failed due to miss-management or out-right fraud.

          • uanime5
            Posted September 12, 2012 at 5:19 pm | Permalink

            Using “parity” rather than “envy” doesn’t change the fact that you want public sector pensions reduced because they’re better than private sector pensions.

            Also many private sector companies only have money because the state pays them to do something, such as empty bins or give the unemployed “training” for two years (Work Programme).

          • Bazman
            Posted September 12, 2012 at 5:26 pm | Permalink

            Workers in the public sector do not pay income tax and private companies employed only by the government are paying tax from non government money? Railways funded by the state and the passengers pay tax from only the passengers? As simplistic as your poverty only exists as the poor spend all their money on booze and fags. What next the housing shortage can be solved by renting and saving for house? Supermarket wages are set by the market and banks are private even when bailed out by the state? Massive pensions and smaller inputs for many of the bosses of all these companies. No market forces for them. Ultimately the state will either have to pay a pension or income support to subsidise these private companies inadequate pension schemes and your fantasies.Ram it.

    • David John Wilson
      Posted September 11, 2012 at 3:32 pm | Permalink

      The tax relief on pensions should be 20% for everyone. That means not just those paying 40% tax or higher but also as a government contribution to those who pay no income tax.

    • Posted September 11, 2012 at 3:46 pm | Permalink

      Scrapping 40% tax relief would make investment in pensions fairly pointless for many. You would put it in and get 20% relief then may pay 20%-50% when you draw it. What is the point of that with all the additional cost and restrictions of a pension scheme?

      • zorro
        Posted September 11, 2012 at 7:41 pm | Permalink

        No point at all, a bit like pensions in reality really. An early 20th century solution trying to solve a 19th century problem and less than adequate to deal with 21st century life…Discuss.

        zorro

        • sm
          Posted September 11, 2012 at 11:19 pm | Permalink

          Remember we talked about a citizens income and flatter taxes. That solves the pension issue and unemployment issue at least partially, we only then have to fund it and cut out all the waste and leave incentives.

    • A different Simon
      Posted September 11, 2012 at 8:01 pm | Permalink

      I’d like to the cost of saving for old age included in inflation figures .

      It does not seem right to include the reduction in mortgage interest to lower inflation figures due to ZIRP without also including the corresponding increase in amount which needs to be saved for old age which would raise them .

      Assuming possibly optimistically that in a 45 year working life :-
      – decent income allowing saving for 40 years
      – out of work for 2.5 years
      – replenishing the coffers after being out of work for a further 2.5 years

      In order to get an inflation linked pension of £12,000 year at 65 :-
      – inflation linked annuity rate of 3% i.e. you have to live 33 years just to get your money back . Providing protection against inflation is expensive !
      – growth in real terms of zero percent

      100/3 * £12,000 = sum required to buy an annuity = £400,000

      £400,000/40 years = £10,000 = amount needed to be saved at today’s prices .

      When you include this in the inflation figures it more than offsets the reduction in mortgage interest payments due to ZIRP .

      There is no prospect of real growth , balancing the books or making a dent in the debt in the next 20 years unless the country hard defaults so we should not assume positive growth in calculations . Even modest growth of a couple of percent would halve the amount which needs to be saved .

  5. Posted September 11, 2012 at 5:39 am | Permalink

    As super states invest more in large jet passenger planes (see the Chinese plans announced this week) these will need to be filled. Family ties which previouslytended to bind high earners to their countries of origin will be less of a factor as relatives will be the ones to travel to the low tax location of that individuals particular choice.

    Long term tax planning for retirement will tend to become impossible when the financially adept will need to be fleet of foot to constantly minimise state theft.

    The alternative is world government, a ghastly prospect and one that requires the complicated planning outlined in your post which makes the dangerous assumption that the goal posts will remain static.

    Transnational ‘Pop Larkins’ IMHO will continue to be the longer term gainers.

    • uanime5
      Posted September 11, 2012 at 7:06 pm | Permalink

      High earners go where the jobs are, not where the taxes are low. High earners also find it difficult to leave a country where their spouse works and their children go to school.

      But don’t let facts get in the way of your argument.

      • Posted September 11, 2012 at 9:41 pm | Permalink

        High earner look at all sorts of thing, pay, quality or life, pay after tax, cost of living….

        Certainly tax is one fairly large part of the consideration for many.

      • Disaffected
        Posted September 11, 2012 at 9:53 pm | Permalink

        Depends how you classify high earners. The real high earners (those earning millions) can escape tax laws and remain here. Those in the £100,000 mark will leave the UK.

        8,000 doctors emigrated over the last five years.

        • Mark W
          Posted September 12, 2012 at 11:17 am | Permalink

          Those in the £100k will leave the country? In some circumstances most likely..

          OR if they broke their back to build a company and 20 years later are reaping those rewards and are still sweating to be able to pay themsleves about £100k, what they do is no longer expand, stop taking on additional workers and keep their pay at the £100k mark to avoid this ridiculous 60% spite tax. Why work more when you can put your feet up. As a company still has to pay the 13.8% employer NI to its owner directors.

          The governement loses the “what could have been 40% over £100k”, it loses the income tax from employees never set on in the first place, it loses other indirect taxes on fuel and VAT as a result of additonal work not being done, and the capital assets that could be used further will stand idle. They will last longer and not provide British jobs to replace them as soon as they would have had they been used more. Fact fact fact!!!

          So why are lefties so unbelievably stupid when it comes to tax rates? High tax rates yeild less for many reasons. It is lack of thought that allows anyone to believe that a higher rate MUST bring in more money. It just doesn’t. And I know exactly what is lost to the exchequer by employing less staff, that there could be work for.

          • uanime5
            Posted September 12, 2012 at 5:26 pm | Permalink

            Care to explain the what the 60% spite tax is. It can’t be due to the loss of the personal allowance because this is reduced by £1 for every £2 earned.

            Your fantasy about lost earning simply doesn’t occur in real life because if one company won’t do the work another will. Thus there is no loss of tax revenues.

            Finally high tax rates have been proven to yield higher tax revenues. Yet the wealthy continue to claim that if their taxes were lower the Government would somehow get more tax revenues, despite all the tax cuts by George Bush not producing more tax revenues.

          • Mark W
            Posted September 13, 2012 at 11:34 am | Permalink

            Over £100k you pay 40% so £2 of income is taxed £0.80p. You then lose £1 of allowance, adding a further £0.40p

            Thus £2 of income attracts £1.20 of tax

            That is why there is a notional effect of 60% tax.

            Typical Labour spite, wrapped in modern day subterfuge and not reversed by the Coalition.

            Some work simply doesn’t get done by others. Many aspects of pleasure are not necessary and therefore where one provider withdraws, another doesn’t come in. It just doesn’t exist.

      • Jerry
        Posted September 12, 2012 at 8:08 am | Permalink

        @uanime5: What absolute poppy-socks! High earners, by definition, tend to go were taxes are low (that is often why such high paying companies are located in such tax regimes) whilst high earners find it easy to provide alternate education for their children either local to their work (sometimes as part of their remuneration package) or by sending them to boarding schools in their country of origin, never mind the fact that the spouses of high earners tend not (to have the need) to work!

        But heck “uanime5”, don’t let facts get in the way of your argument!

        • uanime5
          Posted September 12, 2012 at 5:31 pm | Permalink

          If high earners want to work they have to go where the jobs are, not where the taxes are low. This is why countries with high tax rates never have problems recruiting people.

          Jerry this might surprise you but companies need local branches in a variety of countries so not everyone can live in the country with the lowest tax rates. This is why companies have branches in the UK, rather than moving them their senior executives to Dubai, UAE.

          Jerry you are the one ignoring facts simply because they don’t fit with your ideology. If what you were claiming was true there wouldn’t be anyone in the UK earning over £100,000.

          • Jerry
            Posted September 13, 2012 at 6:07 am | Permalink

            “uanime5”, with yours and Bazman’s socialist tax ideology there wouldn’t be anyone -or at least very few, those who couldn’t escape…) earning over £100,000 in the UK, just like there wasn’t anyone earning those sorts of (relative figures) earnings in the 1970s — what was it called, oh yes I remember, “The Brain Drain”, the Socialists most successfully export…

        • Bazman
          Posted September 12, 2012 at 5:37 pm | Permalink

          He’s right where would many of these high earners find another company daft enough to pay them the wages they are on? Where would they go? London is a very good place to live, educate, work contacts and many other reasons. The tax haven fantasy is just that. Isle of Man? Yeah right. London is very much a tax haven for the rich too and increasingly Non Dom status being used as way around money laundering laws.
          Many of the riches bluffs need to be called. They are not undermining democracy by threatening to leave as remember the witless managers phrase. “We don’t respond to threats”. And that old favourite. That’s is your decision. See how far they go. Not far. Count on it.

  6. norman
    Posted September 11, 2012 at 5:53 am | Permalink

    I’m not a tax advisor either but the message I take from this post is keep as much capital as possible out of (or at least registered out of) the UK. With the recent high profile Jersey cases I think we can assume those with more capital than me are also receiving loud and clear this message.

    I know everyone will mention that you said 50% for higher rate still which is a trivial mistake but shows what a mess Osborne made of it. The Lib Dems have all the credit for raising the limit for lower paid and Obsorne’s token gesture of cutting the top rate isn’t enough to register to those who matter yet cements in those who don’t reach that limits that the Tories are ‘the party of the rich’ while at the same time reinforcing that same message to that same group by dragging them by the hundreds of thousands into the middle 40% rate.

    This political genius threw away a 20% lead at the last election. 2015 (if the thing goes that long) is going to be a slaughter. Against Ed Miliband that’s laughable. Your party has became a joke, sadly.

    • norman
      Posted September 11, 2012 at 5:58 am | Permalink

      Of course the 50% cut to 45% doesn’t kick in til next year so technically I guess it is still 50% but still, I think the thrust of my point remains valid.

      • Bazman
        Posted September 11, 2012 at 6:42 am | Permalink

        If no jobs are created and there is less revenue to the state would the cut still be justified as gift to the rich whilst cutting tax credits for the working poor?

        • Alte Fritz
          Posted September 11, 2012 at 8:12 am | Permalink

          I still remember howls of anguish when the marginal rate was cut from 83% to (I think) 60%. The state cannot manufacture a fair society. It can create conditions for fairness within achievable limits. Achievement is ultimately the task of the individual.

          • Posted September 11, 2012 at 9:43 pm | Permalink

            83% plus 15% SURCHARGE ON UNEARNED INCOME!

        • Richard
          Posted September 11, 2012 at 5:24 pm | Permalink

          A gift to the rich …a very Orwellian turn of phrase, Bazman,, lets just remember who this money belongs to in the first place.

          • Bazman
            Posted September 12, 2012 at 5:08 pm | Permalink

            A tax cut for the rich at the expense of the working poor whilst no benefit to the state or the population is justified is a a gift to the rich. You seem to be under the impression that they are wealth creators and we are the parasites putting no input into the wealth they somehow create from the structures, facilities and the population of this country.

          • uanime5
            Posted September 12, 2012 at 5:32 pm | Permalink

            The people in the company who earned it making and selling the company’s products.

        • Jon Burgess
          Posted September 11, 2012 at 7:30 pm | Permalink

          Some gift Baz.
          It just means people get to keep more of their own hard earned money to spend as they see fit, not how the State sees fit.
          How about all taxpayers got a tax credit in the form of lower tax rates? Erm.. ram it?

          • uanime5
            Posted September 12, 2012 at 5:33 pm | Permalink

            So you want very little tax cuts for the poorest because they pay the least tax but large tax cuts for the wealthy. Don’t expect that to be popular.

          • Bazman
            Posted September 12, 2012 at 5:51 pm | Permalink

            How about all taxpayers getting a credit in the form of low paid workers paid a decent wage by companies making millions in profit and not needing tax credits? Supermarkets wages are set by the market? You ram it.

          • Jon Burgess
            Posted September 13, 2012 at 1:13 pm | Permalink

            No, what I want is for everyone who is a taxpayer to pay less tax and the State to do less and be involved in our lives less, as a result.

        • Jerry
          Posted September 12, 2012 at 8:26 am | Permalink

          Bazman, I guess it depends on what these “rich” do with their money, think about it… Who is the more likely (as much this moderate sums of a 0.5% tax change allows) to “spend, spend, spend” as some parts of the government and the BoE wish [1] (perhaps even invest in new job creating start-ups etc.), or those who are on working tax credits [2] or those who have received a tax cut?

          [1] indeed Ed Balls wants this, hence his call for a (unaffordable) cut in VAT

          [2] because they need such benefits to buy the basics, if that is not so then please do tell us why these people are on such benefits

          • uanime5
            Posted September 12, 2012 at 5:34 pm | Permalink

            The poor because the rich save most of their money (that’s why they’re rich).

          • Bazman
            Posted September 12, 2012 at 5:47 pm | Permalink

            The poor tend to spend all their money on living, or the basics, as they have to. Any extra money given to them gets spent. The rich on the other hand do not need to spend more money and the idea that they will spend or start up companies to give the poor jobs is wishful thinking maybe it will just end up in some offshore account along with the rest? The economy does not depend of a few rich spending and when all the money goes to a few at the top everything breaks down. Taxing the people at the top and reinvesting the money into the democratic society is fundamental to keeping things going and people with money in their pockets is what keeps everything going.

        • Mark W
          Posted September 12, 2012 at 11:25 am | Permalink

          Why would anyone with the energy and abilty to take responsibility for creating jobs, bother when the message from governement is; you work hard, you care when you walk out the gate at night and before you come in at the crack of dawn, so we’ll give you a higher tax rate.

          • Bazman
            Posted September 12, 2012 at 5:08 pm | Permalink

            If only it were like this. Many are just the idle rich or some manager in a company like bankers are.

    • Posted September 11, 2012 at 8:45 am | Permalink

      Jersey – isn’t that where the Osbourne family trust is based? No wonder he looks so bashful.

  7. Gerard Fox
    Posted September 11, 2012 at 5:57 am | Permalink

    A well illustrated piece John. As ever transparency &.simplicity are better suited to encouraging good productive behaviour than a complicated system of reliefs & incentives that are meant to modify behaviour beneficially but in reality which few understand completely & so the message is lost to all except their accountants (if they can afford/have one). By taxing at too high rates we find ourselves trying to modify the system in a needlessly complex manner in order to ameliorate its adverse consequences. And of course we raise the cost of raising that tax revenue into the bargain.

  8. Julian
    Posted September 11, 2012 at 5:57 am | Permalink

    I seem to remember Ken Clarke, when he was Chancellor, simplifying the tax system to two rates, 25% and 40%. I assume every paid tax at those rates but maybe there was as much avoidance then as there is now. Perhaps you could ask Mr Clarke what he makes of the current arrangements in comparison to his time at the Treasury.

  9. Pete the Bike
    Posted September 11, 2012 at 6:24 am | Permalink

    Why should the government seek to encourage people to save, it’s none of their business what we do with the small amount that we have left after their theft?
    However if the government does seek to encourage people to save more then it should put up interest rates, it won’t because that would raise costs on it’s debt binge. If it wants to get more money from it’s tax slaves then it should lower taxes to a flat rate which would boost the economy, it won;t do that because it’s run by left wing, big state pseudo conservatives.

    • A different Simon
      Posted September 12, 2012 at 8:20 pm | Permalink

      Do governments authentically want people to save though ?

      The previous government definitely didn’t ; it wanted them to become indebted and therefore easily controllable . Don’t think this one are much different .

      Surely the tax system discourages saving and investment and encourages debt and leverage :-
      – For a business , interest on loans is treated as a business expense and thus tax deductible .
      – Conversely the tax system makes it very difficult for small companies to retain profits until it can invest them .

      I’m sure people on this blog can come up with much better examples than I can .

  10. Electro-Kevin
    Posted September 11, 2012 at 6:26 am | Permalink

    The main point is that many of us dislike the way the tax is spent and see a country in decline as a result.

    Off topic:

    Boris Johnson is capable of delivering the Tories a landslide election victory.

    It beggars belief that Mr Cameron is under threat from Ed Miliband. Britain cannot afford a Lib/Lab coalition.

    • Lord Blagger
      Posted September 11, 2012 at 8:26 am | Permalink

      The UK is in terminal decline because the big government debts have been hidden off the books.

      They need to keep them secret so people carry on paying in the belief they will get the pension payouts.

      However, the plan is official from the treasury. They are going to change the law so as not to pay out.

      It’s a fraud.

      • Steven_L
        Posted September 11, 2012 at 11:42 pm | Permalink

        It’s a pyramid/ponzi scheme, but so is “the property ladder”. A few winners, loads of losers and basic maths show it can’t work.

      • Jerry
        Posted September 12, 2012 at 8:30 am | Permalink

        @Blagger: Care to cite some information, after all this must be in the public domain for you to know (and for John to publish…), or is this just another one of your opinions dressed up as fact?

    • forthurst
      Posted September 11, 2012 at 5:03 pm | Permalink

      “Boris Johnson is capable of delivering the Tories a landslide election victory.”

      …and we would then get Tory policies? Otherwise, what is the point?

      • Electro-Kevin
        Posted September 12, 2012 at 6:41 am | Permalink

        To save us from a Lib-Lab coalition.

        Better to have an immitation buffoon in office rather than a whole coalition of real ones.

        Not much of a choice, I agree.

  11. Mike Stallard
    Posted September 11, 2012 at 6:38 am | Permalink

    “This all begins to look too clever by half.”
    Mr Brown ruined a working system. Ken Clarke had it almost right.

    So why aren’t the Conservatives getting on with making the system rock solid and easy to comprehend? I mean, I could do it myself!
    Income tax hurts the rich and lets off the poor: in other words everyone, however left wing, can agree with it. VAT has to be imposed as long as we are in the EU.
    All the other taxes are crushing us. And look at the rule book! I would rather read War and Peace three times. Does anyone honestly understand it? Isn’t it all a game of pretence? And inside the Treasury (which used to be two departments didn’t it?) how much real professionalism is there and how much bluff and self protection by seriously compliant ciphers?

    Do you know what? I thought (silly me) that this Coalition was elected by us, the voters, to do something! Nothing but nothing has been done to make this stupid, expensive and ridiculous system work better. No wonder people booed Mr Osborne at the Olympics! He really deserved it.

    • uanime5
      Posted September 11, 2012 at 7:10 pm | Permalink

      Income tax is far more detrimental to the poor than the wealthy because the cost of living is a smaller part of the wealthies’ income.

      • Jerry
        Posted September 12, 2012 at 8:46 am | Permalink

        The cost of living is the same (relative), surely what wealth allows is greater discretionary spending, this creates demand and thus jobs (for the “poor”)?

        • uanime5
          Posted September 12, 2012 at 5:36 pm | Permalink

          The cost of living as a proportion of income is far higher for the poor than the wealthy. This is why there’s so much child poverty.

          Also the “discretionary spending” of the wealthy creates very few jobs, most of which are badly paid.

        • Bazman
          Posted September 13, 2012 at 5:45 pm | Permalink

          The cost of living is not the same for the poor as it is for the rich. It’s expensive to be poor. In fact you do not even have to be rich in order to have lower living costs and to believe the trickle down effect somehow negates this is also not true. Have a think why Jerry and get back to us. I just can’t be arsed explaining it to you.

          • Jerry
            Posted September 14, 2012 at 7:10 am | Permalink

            I’m sorry but I can’t allow both Bazman and uanime5 to claim that it takes more money for a poor person to live than someone with wealth (now I know that socialists often talk about different species when referring to the rich, but they normally use such terms as a form of abuse, not literally…), the only reason why the ‘cost of living’ is higher for anyone is because they buy the wrong foods, products and services [1], I suspect what both Bazman and uanime5 mean is that the poor have less disposable income left after the cost of living.

            [1] yes I know that there is an anomaly within the energy sector, something the politicians should really close down.

          • Bazman
            Posted September 14, 2012 at 6:12 pm | Permalink

            The poor have less disposable income this is true but what is also true is why they have less disposable income.
            It takes more money for the most in that you have to pay rent on money or property if you are not wealthy enough to earn property outright. You have to pay somebody or some organisation, so you have less money for not owning and asset. You are more poor than someone who does own an asset and this costs money. What do you not understand?
            Also because the poor have in general less education they are inclined to buy the wrong products and services and have a low paying job. Not in all cases, but this holds true. They eat expensive ready meals for example and smoke. Even if they do not they tend to find it difficult to make ends meet, as I said often because of rental agreements. This brings them into contact with predatory lenders in many forms. Loan sharking for example in the desperate range. No banking services for many. Ripped off by respectable utility companies as you point out.They are less likely to have a car making trips to cheaper supermarkets a problem and are less able to pay insurance costs upfront and in full attracting more debt cost which they are constantly fighting against to feed themselves and stay in their homes and maintain equipment.
            Now this is the clincher: Being poor is a daily grind without end or reprieve this on it’s own needs escape in one form or another so often money is spent on some form of escapism. Alcohol being the favourite. The middle classes might buy a stereo or some clothes, the poor vodka leading to more problems and debt. Many are isolated and not supported n by family or the middle class social security system. Does not exist? I this why have you so little to say about it. You can pretend if you like.
            This idea that if they just lead virtus lives they would not be poor is for the birds. It’s hard to be a saint in the flats where you live. Get back the years you gave in the taking of Peckham? Ram it.

  12. Electro-Kevin
    Posted September 11, 2012 at 7:01 am | Permalink

    £34,370 a ‘relatively low income’

    Thank you.

    It was recently reported that a family income needs to be £36,000 in order to cover basics. I can confirm. This sort of income was unthinkable for the average person even a few years ago and for many it still is today. You quote a £42k pension but that is more than shown on my best P60 with overtime and rest days included though I am considered to be in a well paid job and feel very lucky to have it.

    That politicians have needed increases in their allowances also shows the true pace of inflation and the 40% tax threshold is way too low. Alas we are broke and someone has to pay.

    Where I am bothered, however, is the level of parental income whereby university applicants are considered to be ‘privileged’ and, therefore, overlooked in order to make way for the ‘deprived.’

    • A different Simon
      Posted September 11, 2012 at 8:00 am | Permalink

      I don’t know whether you have dependents but personal tax free allowance is £8,105 .

      Standard rate income tax is for the first £34,370 of earnings above the personal tax free allowance i.e. a total income of £34,370 + £8,105 = £42,475 .

      I don’t see how a single person without access to a defined benefit pension scheme who hits peak earning potential of £42,475 at about 45 years of age can build up sufficient savings to provide for their old age .

      Cost of living is just too high throughout most of the UK .

      • A different Simon
        Posted September 11, 2012 at 8:11 am | Permalink

        I don’t think fiddling with the income tax system is the answer .

        Cost of accommodation and energy have to be brought under control by destroying monopolies and addressing the housing shortage . Measures have to be implemented to stop any surplus discretionary income being mopped up by landlords .

        Remember employment/income taxes are designed to preserve the status quo :-
        – prevent the plebs from getting above their station
        – keep the Lords in the Manor

        Employment taxes are amongst the most damaging kinds of taxation .
        We’d do better as a nation by trying to ensure that the dividends from communally owned assets (and what should be communally owned assets i.e. land) accrue to everyone .

        • AlexW
          Posted September 12, 2012 at 9:50 am | Permalink

          A housing shortage? Wouldn’t that suggest house prices are rising? Pls can you explain why house prices are falling?

          • uanime5
            Posted September 12, 2012 at 5:38 pm | Permalink

            Wages are falling in real terms.

          • A different Simon
            Posted September 12, 2012 at 7:36 pm | Permalink

            Alex W ,

            The price depends partly on the severity of the shortage but beyond a certain point on the availability of credit .

            The reduction in the availability of credit is what has caused the price reductions in my opinion .

            There is a market where the availability of credit has a less pronounce effect ; the rental market where prices have been rising like you would expect .

            Since the demise of occupational pensions plans for the masses , peoples entire pay package has been available immediately and the cost of living has adjusted upwards to strip them of it .

            People have been paying the interest on their mortgages with money which should have been saved for their old age .

            This is one of the reasons future demand will be weak ; it has already been brought forward and spent .

            Without a proper plan and radical 21st century solutions I don’t see how the situation can be fixed .

            N0thing John has proposed in the area of housing and pensions addresses the situation .

        • Bazman
          Posted September 13, 2012 at 5:51 pm | Permalink

          You either rent the money or the property, both of which are in short supply. Rents are risking, but property price largely remains the same, so what does that tell you?

      • Electro-Kevin
        Posted September 12, 2012 at 6:53 am | Permalink

        ‘The cost of living is too high throughout most of the UK.’

        Is that another way of saying that we are getting poorer ?

        If so then I think I understand why and how it’s happened – and that, in so many ways, our people deserve it. (Applauding Gordon Brown at the Olympics ???)

        My whole point here is the obsession with ‘equality’. The classification of 40% taxpayers as ‘privileged’ and being treated as such when it comes to things such as university admissions.

        • A different Simon
          Posted September 13, 2012 at 9:35 am | Permalink

          “Is that another way of saying that we are getting poorer ?”

          Yes but the solution is not raising wages , it’s decreasing the cost of living , in particular housing which serves to enrich money lenders and land owners and impoverishes everyone else .

          If we do not take measures to deal with the cost of living for everyone , then we are going to have to provide them with benefits for the rest of their life .

          As with most things in life you cannot escape paying , it’s just a matter of whether you do it properly by fronting money for affordable housing or later with kludges like benefits . Pay now or pay more later . The subsidies ultimately flow upwards to our masters , not downwards to those struggling beneath us .

          Wages are still amongst the highest in the World if you current currency exchange rates . However , are those exchange rates really set by the market or are they rigged like Libor and where are they heading ?

          Wages won’t looks so high when the pound is at parity with the dollar .

    • Bazman
      Posted September 14, 2012 at 6:13 pm | Permalink

      There should be no minimum income and 35k+ a year is not much? Hmm!

  13. Posted September 11, 2012 at 7:12 am | Permalink

    John. A well thought and argued piece but if you’ll allow the pedant in me to make one observation it is this: You wrote Dividend income is taxed at a lower rate than other income, encouraging people to invest in businesses.. It should be remembered that dividend income is taxed at a lower rate because it was already taxed at the corporate level. Dividend distributions are made out of after tax profits in a company’s books.

  14. Brian Tomkinson
    Posted September 11, 2012 at 7:24 am | Permalink

    JR: “there is a perpetual tussle between the government, wanting to collect more, and most people and companies, wanting to pay less.”
    There we have it, government doesn’t represent the will of the people. You politicians are, like all addicts, unable to quit your habit – which is to tax and spend. There is no hope for this country.

  15. NickW
    Posted September 11, 2012 at 7:38 am | Permalink

    It is worth pointing out that both Labour and the Liberal Democrats are now fumbling around in the dark trying to find more things to tax. They have abandoned any effort to find ways of reining in Government spending and are now trying to fill the revenue gap with more tax.

    The figures for the Greek Government show that Government spending has not been reduced and that all the deficit reductions have relied on tax increases.

    The catastrophic implosion of the Greek economy is due to the implementation of policies recommended by Labour and the Liberal Democrats.

  16. Tedgo
    Posted September 11, 2012 at 7:53 am | Permalink

    I am all for tax simplification. I believe in combining employee NI with income tax and having a flat rate tax of about 32%.

    This would apply to all including pensioners and the self employed. It would spread the tax burden over a greater proportion of the population, essentially lowering taxes to all. I do not see why people with larger pensions should not pay the same tax rates as everyone else. Equally the self employed would be taxed in a similar way to employed persons on PAYE.

    Secondly I would make a fundamental reform as to how income tax is calculated and effectively introduce negative income tax. The tax due would be calculated on the gross income then a free tax allowance would be subtracted. The allowance would be say £7000.

    It works like this, add up your total income and multiply by 32%. Then deduct £7000. If the result is positive that goes to the tax man, if its negative then the taxman pays it to you.

    Income would also include dividends, savings interest and tapered capital gains.

    Every adult would have this free tax allowance, so if you don’t work you still get the £7000. This is fair to people who look after their children or elderly parents, do charity work or cannot find a job.

    There would be no unemployment benefit or other state pension, nor any universal child benefit. Having children is a lifestyle decision in an over populated country/world. Any other benefits would be limited to cases of real hardship and means tested, with a limit on a household basis, to 80% of the national average wage.

    The advantage of this scheme is that you always get to keep 68% of what you earn in the way of work or additional pensions. That is it always pays to work and save for a pension.

    • a-tracy
      Posted September 12, 2012 at 7:56 pm | Permalink

      What about Employer’s NI? Not paid by the self-employed. Do you agree with this tax on paye job creation in the private sector?

      • Tedgo
        Posted September 13, 2012 at 7:14 am | Permalink

        I would like to do away with employers NI but I do not think that would be possible while the government spends so much. If and when they get spending under control then employers NI should go, leaving only income tax, VAT (or better still sales tax) and duties as the main source of revenue.

  17. The Prangwizard
    Posted September 11, 2012 at 7:53 am | Permalink

    I’m no expert either, but I’m close to one aspect of this taxation complexity, and that is the figure of £24,500 earnings limit for those over 65 years. As I understand it, for every £2 earned above that £1 is taken from the tax-free allowance. This has always stuck me as vindictive. At the lower level of income like myself I imagine that many people will decide that working is not worth the bother if it takes them over the threshold. Those on very high incomes may not notice the loss so much. Low earners continue to be caught if the tax-free allowance rises as there is more of it to be eaten away, and if the earnings limit is not raised by at least as much. Surely this earnings limit could be done away with without much loss to the Treasury.
    This is detail; I favour radical change overall – some form of flat rate system.

  18. Sebastian Weetabix
    Posted September 11, 2012 at 7:56 am | Permalink

    For the life of me I don’t understand why we don’t have a simple flat rate. All income, irrespective of source, be it dividends, wages, interest, rental income etc etc taxed at 20%. No exemptions.

    • sm
      Posted September 11, 2012 at 11:26 pm | Permalink

      But the likes of certain presidential candidates probably wouldn’t like it.

  19. oldtimer
    Posted September 11, 2012 at 7:57 am | Permalink

    You have just described another fine mess. The solution, which will not be applied in the UK, is the adoption of a flat tax regime at a rate that does not discourage saving and investment but actually provides some encouragement for it.

    In the past I have invested in EIS schemes. By their very nature they are risky – the ones I invested in went bust. VCTs are similarly risky but at least a portfolio of 20+ businesses (as found in VCTs) offers the chance of at least one or two of them succeeding to compensate for the inevitable failures and pedestrian performers who just bumble along. Overall my VCT investment performance has been quite pedestrian. The constituent companies (with a few exceptions) are struggling in the current environment. When I originally invested in such schemes, I took the view that it was risk capital that I should be able to afford to lose. My VCTs have provided a poor and uncertain annual return and no prospect of getting my original investment back. I stopped investing in them some years ago.

    The overall economic environment is very hostile for such risky investments. It seems odd, and counter-productive, for politicians to believe that they will succeed in encouraging risk taking in the uneven, unpredictable tax environment of the UK. More tinkering with EIS/VCT tax rates, without fundamental reform of the wider tax system will, in my opinion, be ineffective.

  20. Iain Gill
    Posted September 11, 2012 at 8:01 am | Permalink

    dont forget the murky world of expenses and what you can and cannot claim for. who is entitled to what amounts tax free for working away from home, the most obvious abuse being ICT visa holders who can claim a lot more than Brits working away from home in the UK.

    you can put laptops and such like down as expenses if you work freelance via a limited company or umbrella company but not if you work PAYE for end client, why?

    foreign nationals get to work the first year national insurance free why?

    much easier and simpler system would be easy to come up with

  21. Tim Hall
    Posted September 11, 2012 at 8:05 am | Permalink

    Britain has one of the most complicated (and extensive) tax systems on earth and the evidence of why this badly needs reform is all around us – The government choose to ignore it. The demands for ever increasing income (benefits or earned) are driven by the fact that we are allowed to keep an eve decreasing proportion of that income. The government makes it worthwhile and sensible to indulge in tax avoidance. Flat tax is the answer but it will never happen because that would result in a loss of power from the state and because the nation perceives progressive taxation as both fair and efficient. The government that we get is the government that we deserve.

    • uanime5
      Posted September 12, 2012 at 5:43 pm | Permalink

      Given that any flat tax will result in a massive tax cut for the wealthy don’t expect most people in the UK to regard it as fair.

      • Bazman
        Posted September 13, 2012 at 5:57 pm | Permalink

        Also a cut for the poor, but a rise for those in the middle and reduction of overall revenue. Works in Eastern Europe for now where tax evasion is taken to extreme and dangerous levels, but you don’t think the middle classes in this country are about to buy houses with bin liners if cash any time do you?

      • Richard
        Posted September 17, 2012 at 4:44 pm | Permalink

        There is a good chance that under a flat rate tax system more revenue would be obtained.
        And that must be the reason tax is applied…to raise money?

        Top 1% currently pay 23% of income tax…still not enough for you I expect.

        Guilloutines ready yet????

  22. Lord Blagger
    Posted September 11, 2012 at 8:19 am | Permalink

    Given the relatively high levels of UK taxation today, there is a perpetual tussle between the government, wanting to collect more, and most people and companies, wanting to pay less.

    =============

    So lets see.

    Democracy is acting on the will of the people.

    You as government however are out to subvert the will of the people by extracting money using the same techniques as the mafia.

  23. Posted September 11, 2012 at 8:49 am | Permalink

    I understand that Labour introduced tax allowances for companies in the 60’s. They’re too close to big business interests by half.

  24. Simon
    Posted September 11, 2012 at 8:54 am | Permalink

    As Mr A, B, and C are richer than (at a minimum) 99%, 99%, and 99.5% of the population, their minor tax differences are fairly unimportant when considering the country as a whole.

    Take office worker Mr D. on a UK median wage of £22,000, perhaps with a wife who earns £14,000 as an NHS physiotherapist for stroke patients, who are planning to have a child. Then talk about how they reduce their tax burden by paying more into a pension, or putting money into an ISA.

    • sm
      Posted September 11, 2012 at 11:29 pm | Permalink

      God bless that physio and my heartfelt thanks.

    • AlexW
      Posted September 12, 2012 at 10:05 am | Permalink

      No. Use this app from the IFS:-

      http://www.ifs.org.uk/wheredoyoufitin/

      £72,000 gross household income for a couple with two kids (one young, one old) puts B in the 90% percentile of the household income distribution.

      The top 10% of earners pay 53% of all income taxes (never mind NI, CGT, IHT, VAT etc), so their situation, far from being “relatively unimportant”, is actually decisive in understanding taxation policy.

      Reply: Indeed – and this salary is below that of Head teachers, GPs, hospital consultants and executives, Council executives and the like.

      • Simon
        Posted September 20, 2012 at 2:25 pm | Permalink

        £72k was ‘his’ income, not his household income. If his wife chooses not to work, that that’s their choice to so limit their household income.

  25. Captain Crunch
    Posted September 11, 2012 at 8:54 am | Permalink

    When are the Government going to do something about this?

  26. Mike Wilson
    Posted September 11, 2012 at 8:55 am | Permalink

    I don’t know what to say … here we have, let’s say, a senior MP – one who has been around for a while and (I think) has been a minister before – effectively stating that the tax code is ludicrously complicated.

    What is being done about it by the government of which Mr. Redwood is a member?

    Absolutely nothing.

    It’s very reassuring, somehow, to have a government determined to make no changes and to keep the seat warm for Labour to finish the job. Perhaps when Labour are back in and drive the country to its final ruin, we can start again with something different.

    Reply: I am not a member of the government

  27. Stephen Almond
    Posted September 11, 2012 at 9:03 am | Permalink

    I think it is a total disgrace that people are subjected to a tax system that they cannot (possibly) understand.

    • Bazman
      Posted September 13, 2012 at 5:58 pm | Permalink

      Especially the ones who do not pay any tax or are able too..

  28. merlin
    Posted September 11, 2012 at 9:04 am | Permalink

    I would say that the average joe soap goes to work and earns say £20-£30.000 per if he’s lucky. He pays income tax, national insurance, vat, insurance tax, council tax etc and at the end of the week or month after all these deductions looks at his wage packet and thinks about all the money that he has worked hard to earn being taken by the government. His job is not guaranteed for life and the sack or redundancy is a realistic possibility. All this complexity in tax affairs is not something that he has any inking of or any interest in at all. This is probably 80% of people in this country now. The other 20% have accountants and lawyers to sort out their tax affairs so never really think about it too much. I tend to think that the complexity of tax affairs is a something if you are a politician you love to talk about and discuss and argue about, but for the majority it has no significance at all. Most people, probably go to work not because they want to, but because they have to, to survive, they may complain about how much tax they are paying but will do nothing about it. Systems are created by bureaucrats and politicians citing 40 years working life and getting to 65 and 67, for me, this is theoretical nonsense and does not take into account the reality of everyday life which is very hard for most people and is a long way from the corridors of power. Politicians are self serving and extremely detached from the average man in in the street, and create systems which are very complex and do not consider the common man. Today’s topic is for the 20% of people who actually can consider the tax system detail. two final points about tax

    1) Keep it simple stupid (KISS).

    2) The more important something becomes the more complex it becomes.

    But we all know this will not happen and we will continue to be over governed and over taxed till the day we die.

  29. Lindsay McDougall
    Posted September 11, 2012 at 9:16 am | Permalink

    Just suppose that the government spent less so that it didn’t need to borrow so much from the public, that the government stopped trying to influence the behaviour of individuals, groups and companies, and that corporation and investment income were taxed at the same rate as employment income (with no tax bonuses through ISAs). You could do it if you had corporation tax in the low twenties and a flat rate of income tax at the same level (but with NI addded). The savings in tax administration would be enormous.

    On successive days, you have identified VAT, inheritance tax and income tax as being too complicated in their application. I agree. That’s something that the House of Commons can do something about. If the Chancellor agrees with you, then perhaps a start can be made in he 2013 budget.

    • Lindsay McDougall
      Posted September 12, 2012 at 12:16 am | Permalink

      Sorry, that should be CGT not VAT, though you could say that VAT rates are also too complex.

  30. David Jarman
    Posted September 11, 2012 at 9:22 am | Permalink

    Tax has been like the boiling frog syndrome. You turn up a little again and again, because if the government introduced a new system saying we are going to STEAL 70% of everything you own by a procedure as complicated as we can make it so it is not quite so obvious there would be riots in the streets. The amount of tax now stollen from people is completely immoral and can only be justified by those who protect themselves from it. And having said that politicans might think it is legal but I can assure EVERYBODY it is UNLAWFUL and they should research the difference!

  31. Acorn
    Posted September 11, 2012 at 9:24 am | Permalink

    Not sure where you are going with these last few posts on tax JR, is there a punch line coming? Anyway, my next will not go down well on this site as it concerns the Eurozone. Particularly the ECB and the OMT which is a replacement for the SMP and indirectly parallels the ESM which is the replacement for the EFSF – or was it the EFSM, … got that … good.

    JR, I need you to be brave now, and allow this link because it may come from the left but don’t dismiss it out of hand. Remember, we are all in this together.

    http://bilbo.economicoutlook.net/blog/?p=20935 . It is a good explanation of what the ECB is trying to do as a “currency issuer” that can never be insolvent like what a “currency user” can. The austerity programme will negate the very outcome that the ECB Bond buying, cash injecting move, is trying to achieve. Any similarity with the UK situation is purely incidental 😉 .

    Central Banks at times like these remind Commercial Banks, “Central Bank Reserve cash injections should not be treated as capital by Commercial Banks”; well, not for ever, just till you get on top of all those toxics you still can’t shift.

  32. Denis Cooper
    Posted September 11, 2012 at 9:39 am | Permalink

    The first thing that strikes me is that the three cases of A, B and C all relate to a small minority of the population.

    Referring to the (albeit out of date) distribution of incomes given here:

    http://en.wikipedia.org/wiki/Income_in_the_United_Kingdom#Percentile_points_for_income_of_individuals_before_tax

    all three men are in the top 5%, while C is close to being in the top 1%.

    If a political party is going to propose tax reforms primarily on the basis of how they would affect a small minority at the top then it has to consider how the great majority of the electorate will react to its proposals.

    For example, a proposal which reduced the income tax liabilities of the likes of A, B and C would obviously attract much less support than a proposal which entirely removed half of the adult population from the income tax system.

    Referring again to the distribution of incomes, the £10,000 threshold which is now being planned for some years hence would have exempted only about a fifth of the adult population in 2007-8, while a threshold set at the median income of of £18,500 would have exempted half.

    The government has a choice between entirely removing large numbers of people from the income tax system, or continuing to insist that it must have a necessarily small slice of each of their small incomes, thereby wasting their time and effort on making returns, and wasting public money on Inland Revenue staff to deal with the returns, and in the process discouraging productive work and encouraging criminality in the form of tax evasion.

  33. Matthew
    Posted September 11, 2012 at 10:22 am | Permalink

    Tax is too complicated.

    Governments set out to micro manage the economy with little adjustments and concessions here and there, in an attempt to target segments of the population.
    In this approach there are often unintended consequences.

    Take Mr Clegg’s idea of a wealth tax, intended to hit the wealthy for their “fair share” the consequence would probably be that the working class man is hit more as the wealthy spend rather less on goods and services. (or flee the shores)

    Better to leave the management to a minimum and keep the overall taxes low.

  34. Denis Cooper
    Posted September 11, 2012 at 10:36 am | Permalink

    The second thing that strikes me is that there is no challenge to the ingrained assumption that “earned” and “unearned” income should be aggregated for income tax purposes.

    I don’t see the sense in that, knowing that it means that somebody who has prudently set aside some of his previous earnings in savings and investments can then be pushed into paying a higher rate of tax on his present earnings, or equally paying a higher rate of tax on the income from his savings and investments.

    I’m sure there must be some historical reasons why the income tax system developed on these lines, maybe because income tax started by taxing the landowner on his rental income from his estate but not taxing the labourer on what he earned working in the fields, but then later the tax was extended to the earnings of the labourer, but it no longer makes sense when large numbers of ordinary people get income both from the work they perform during a year and from the savings and investments they have managed to build up over many previous years, partly by reinvesting rather than spending the income.

    And in recent decades successive governments have implicitly recognised that it makes no sense, but their response has not been the simple and obvious reform of separating “earned” and “unearned” income for tax purposes but instead to devise complex and restrictive schemes to allow people to shelter some of their “unearned” income from tax – starting with the Tories’ PEPs and TESSAs, and now with Labour’s “me-too” replacement, ISAs, plus more recondite schemes some of which go back much further.

    So we have governments ostensibly encouraging people to save, including “people of modest means” as Labour liked to put it, yet the same governments have retained an income tax system which is set up so that income from their savings and investments will automatically be taxed if they are in work and earning enough to be able to save, and so in an attempt to correct that problem governments have set up special schemes to encourage people to save, but only under pointlessly and inconveniently restrictive conditions … none of it makes sense to me, especially when a much simpler solution is readily available.

  35. Chris Rose
    Posted September 11, 2012 at 10:41 am | Permalink

    I detest the way politicians extol pensions and penalise savings. What’s the difference? Why should there be tax relief for pensions and not for savings? We should encourage people to save for their old age; and the tax system should be indifferent to the way they choose to do it.

  36. boffin
    Posted September 11, 2012 at 10:48 am | Permalink

    On complexity:

    The use of discrete ‘tax bands’ is archaic and divisive. It is the result of incompetence in high office (people who read PP&E because they were no good at maths). It makes tax unnecessarily hard to calculate.

    Whilst the politics of envy/greed/Marx continue to dictate that effort and enterprise shall be taxed at higher rates on higher incomes, it is possible to do this in a continuous progression and much more efficiently with a simple formula which is easy to handle with a £2 pocket calculator.

    TAX = a + bx + cxx + ….

    – where x is income and a, b, c, etc. are constants set by the Treasury to determine the start and shape of the smooth ripoff curve.

    (Weierstrass theorem, q.v.)

    • wab
      Posted September 11, 2012 at 9:11 pm | Permalink

      If you have a function to specify income tax then you don’t need to find a polynomial approximation (guaranteed to exist by the Weierstrass Theorem under certain conditions), just use the function directly. One such function is the existing income tax band one, and this function is continuous and piecewise linear and makes more sense than your quadratic (or higher order) approximation, which has poor behaviour as x goes to infinity (it blows up much faster than any linear function). Believe me, rich people would far prefer the existing tax rate compared to any higher order polynomial approximation. Of course many people on this blog advocate just a+bx.

      (Stamp duty is also piecewise linear but it is idiotic because it is not continuous but jumps at the band boundaries.)

    • Bazman
      Posted September 13, 2012 at 6:09 pm | Permalink

      Let me expand this for you.

      TAX = a + bx + cxx +

      TAX = a + bx + cxx +

      T A X = a + b x + c x x +

      T A X = a + b x + c x x +

      Etc.

      In a democracy the rich are supposed to pay more to cover things like building and maintaining the roads and schools because these are the things that enable their wealth. They actually do use the roads and schools more because the roads enable their businesses to prosper and the schools provide educated employees. But it isn’t just that the rich use roads more, it is that everyone has a right to use roads and a right to transportation because we are a democracy and everyone has the same rights. And as a citizen in a democracy you have an obligation to pay your share for that. with the rich having a greater responsibility than the rest of us because they receive the most benefit from it. This is why we have “progressive taxes” where the rates are supposed to go up as the income does.

      (Bazman Ramit theorem, q.v.)

      • APL
        Posted September 13, 2012 at 9:09 pm | Permalink

        Bazman: “In a democracy the rich are supposed to pay more to cover things like building and maintaining … blather blather bla bla dribble drool”

        You are such a joker, Bazman.

        • Richard
          Posted September 17, 2012 at 4:38 pm | Permalink

          It is rare to find a lefty with a sense of humour. Especially when being reflective.

          • Bazman
            Posted September 17, 2012 at 6:08 pm | Permalink

            Care to name any right wing comedians Jerry. We are still waiting for one name.

  37. Mark W
    Posted September 11, 2012 at 11:24 am | Permalink

    I must compliment Mr Redwood for highlighting the deceptive and spitful 60% tax band (62% with NI) between £100k and £116k. (£100k to £120k when allowance is £10k).

    All the flannel about the 50% rate at £150k hid this slight of hand by Alistair Darling (I must add that I still believe Mr Darling was one of the few competent ministers of the Labour era and I would like to believe this decison was forced on him by Gordon).

    The ommison by Mr Redwood (possibly unintentional as there’s too much detail to cover, the main point of the posting). Is the 49.74% (51.74% with NI) band from £50k to £60k if you have one child. Higher if you have two.

    This is the result of removing child benefit from “high” earners. If child benefit is going to exist, and it always will for the feckless and work shy, why penalise homes with a stay at home parent?

    If a couple both earn £30k each they get £16.2k free of tax and £43.8k taxed at 20%. If you have a couple where one works the other doesn’t on £60k you only have £8.1k tax free and £26.27k at 20%. The rest at 40%. So if the non working person is not allowed to transfer their tax free allowance and 20% band to the working partner, why can their child benefit be pushed into the equation. Either allow the tax and the benefit be considered or neither.

    I cannot believe the Conservative Party has allowed this attack that so deliberately targets couples where one parent gives themself up to be a full time carer to their child.

    I’m not a fan of the politics of envy behind the 50% tax band, but these vicious rates at lower levels need addressing and an air of publicity.

  38. Mark
    Posted September 11, 2012 at 11:43 am | Permalink

    It might be an interesting sum to consider Mr A’s investment in national savings bonds. For all he pays no income tax now, the inflation tax on his investment must be considerable over the years given the limitations on holdings of index linked bonds.

  39. Denis Cooper
    Posted September 11, 2012 at 12:11 pm | Permalink

    Off-topic.

    Unreported by the media, the European Union (Approval of Treaty Amendment Decision) Bill completed its passage through the Commons yesterday evening, and after the Bill has been through the formality of Royal Asssent and become an Act the UK government will deposit its intrument to ratify the radical EU treaty change agreed by EU leaders on March 25th 2011.

    http://services.parliament.uk/bills/2012-13/europeanunionapprovaloftreatyamendmentdecision.html

    Anyone who watched what passed for a “debate” in the House of Commons would understand how our Parliament has got us into such a godawful mess with the EU over the past forty years, and would see that unless and until there is a major clearout of the Commons we can only expect a continuation of the same.

    I could pick out a number of MPs who managed to come up with ill-informed and irresponsible and often self-contradictory nonsense yesterday evening, but I would highlight the speech by the supposed “eurosceptic” Jacob Rees-Mogg, which starts at Column 97 here:

    http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120910/debtext/120910-0003.htm

    Even though I watched him speak I still can’t say whether he was trying to be satirical – maybe he wasn’t sure himself what he was trying to do – but his speech verged on the childish and was not at all amusing.

  40. forthurst
    Posted September 11, 2012 at 12:12 pm | Permalink

    Today is the anniversary of 9/11; much to the chagrin of those who would have prefered it to have become ‘water under the bridge’, questioning of the official version of events used to justify several wars of choice and aggression, as well as to impose NKVD-style repression on freedom loving Westerners, has never been higher; ‘news today, fish wrap tomorrow’ has been replaced by a new internet-based paradigm in which people decide what they wish to remember and to discuss.

  41. barry laughton (@kil
    Posted September 11, 2012 at 12:32 pm | Permalink

    To simplify the whole thing, there should be a flat tax on all and every domiciled person’s income worldwide. National Insurance should be scrapped. Less civil servants, less paperwork. Just one form to declare income and sources.

  42. Bert Young
    Posted September 11, 2012 at 12:44 pm | Permalink

    “Too many twists and turns ” – absolutely right .

  43. Richard1
    Posted September 11, 2012 at 12:54 pm | Permalink

    The evidence that simple tax systems with low rates produce superior economic performance and greater tax revenues is overwhelming, and that the reverse is true. The evidence comes not just from Britain but from around the world, with decades of data now available. The problem is that the Left arn’t really interested in maximising either economic performace or tax revenues. They are interested in equality of outcomes and in particular in using resentment of wealth as a route to power. The election of M Hollande in France with his absurd policies is the latest example. With a few honourable and worthy exceptions, the egalitarian-envious Left includes most of the Labour and LibDem parties. With Cameron trying to capture marginal votes from the centre-left, we are condemned for the moment to continue with revenue-reducing and economically damaging high and complex taxes.

    • uanime5
      Posted September 11, 2012 at 7:16 pm | Permalink

      I notice that despite your claims that the evidence for low tax rates generating higher revenues was “overwhelming” you couldn’t provide any evidence. I take it you don’t have any evidence to back up your claim.

      • zorro
        Posted September 11, 2012 at 9:35 pm | Permalink

        I quoted some examples on a previous blog and you just dismissed them outright and rubbished the website link. Of course,, you are immune from providing evidence to back up your own claims.

        zorro

        • uanime5
          Posted September 12, 2012 at 5:56 pm | Permalink

          Your web link didn’t contain any examples of increased tax revenues, it just said that the wealthy paid a higher percentage of the tax revenue. I pointed out that this could only occur if the wealthy were paying themselves higher salaries, resulting in income disparity increasing.

          I often provide website that back up my claims unlike you.

          • zorro
            Posted September 13, 2012 at 8:29 pm | Permalink

            It could also mean that they were paying more (higher percentage of tax revenue) than they were before under higher tax rates, which is something that you will never accept.

            zorro

      • Richard1
        Posted September 12, 2012 at 7:10 am | Permalink

        It has been repeated extensively on this blog – which you should have noticed as you are so active here. Examples include: the UK in the 1980s; the US in the 1980s; Hong Kong in the 1960s; Sweden in the 2000s; Canada in the 1990s; Russia in the 2000s; the whole of Eastern Europe snce 1989; China since the Deng reforms. Examples going in the other direction (ie high taxes / big state destroying economic performance) include: Eastern Europe in the period 1945 – 1989; North Korea (vs South Korea); Cuba; Zimbabwe. Assuming M Hollande isn’t forced into a fudge or U-turn on his nonsensical policies, no doubt France in the coming years will provide another test case.

        • uanime5
          Posted September 12, 2012 at 6:00 pm | Permalink

          Quoting random dates isn’t evidence of anything. You have to actually do real research into what the problem was and which factors lead to it being resolved. Posting random dates then claiming that large Governments are bad shows that you don’t have any evidence nor do you have the ability to research this issue.

          • Richard1
            Posted September 14, 2012 at 8:03 am | Permalink

            What are you talking about? The point is the issue has been researched extensively & I have listed some of the examples resulting from that. This blog doesn’t have the space or the appetite for a PhD thesis on it. I notice you do not dispute these examples nor come up with any evidence to the contrary. You are ‘in denial’ (as a lefty might say) on this issue.

      • AlexW
        Posted September 12, 2012 at 10:12 am | Permalink

        Google “optimal taxation” then come back to us.

        • uanime5
          Posted September 12, 2012 at 6:18 pm | Permalink

          Optimal taxation is concerned with the best way to tax people, not the lowest way to tax people. It does not claim that lower taxes are better for the economy.

          • Richard
            Posted September 17, 2012 at 4:35 pm | Permalink

            More always more….. and there in lies the route to disaster.

            Love that bit….. lower taxes ….not better for the economy…brilliant!

  44. Bob
    Posted September 11, 2012 at 1:07 pm | Permalink

    So, two parents earning £49k each would qualify for child benefit, but if one earned £60k and the other earned £38k they would not qualify.

    In both cases, the total household income is £98k, but the benefit depends on how the 98k is divided between the two parents.

    This tells us what we need to know about George Osborne’s sense of fairness.

    Some reshuffle!

    • Narrow Shoulders
      Posted September 11, 2012 at 8:16 pm | Permalink

      Additionally if that £98K was earned by just a single parent in the family with the other parent as a child carer that family would also lose the benefit of the second £8,105 tax free allowance which increases the tax burden on the single earner @ 40% of £8,105 (£3,242) even before that earner is taxed extra to take away the non-worker’s child benefit.

      But it’s OK because anyone earning over £50K has broad shoulders and hasn’t adjusted their lifestyle to account for their current income have they? £50K pays for very little in London.

      Fair? I’d be better off divorced.

  45. Posted September 11, 2012 at 1:08 pm | Permalink

    Complexity is the friend of the bureaucrat, it helps them to justify their existence.

    Employing tens of thousands of bureaucrats in HMRC to take money off the people in taxes then employing tens of thousands more in the DWP to give it back again is madness that can only be justified by a bureaucrat.

    The people and businesses have been crying out for simplification for years but their cries are always in vain.

    The truth is that the current system allows government and its bureaucracy to pry into the personal and private details of both individuals and businesses and hence excersise control over both.

  46. Muddyman
    Posted September 11, 2012 at 1:27 pm | Permalink

    Income Tax was introduced in order to pay for the defence of the realm – the primary duty of Government – all of the rest is political manoeuvring with the aim of maintaining office. Lets start again and review from first principals .

    • Bazman
      Posted September 13, 2012 at 6:18 pm | Permalink

      Society or at least for most of us has moved on from the Napoleonic wars Muddyman and the population has higher expectations and one of the principals expected since then is not to starve as you cannot afford to eat. A few more too. A bit less urgent I must say.

  47. Dan H.
    Posted September 11, 2012 at 3:40 pm | Permalink

    At the heart of it, tax is legalised theft. Thievery is only tolerated by the public if they can see a greater good coming from this than would accrue if they simply held on to the money themselves. As things stand, we are paying billions every year to an organisation so corrupt that not even its own tame poodle of a tax watchdog can bring its self to certify the accounts as free of fraud, and the Government is also indulging in such insanities as sending international aid money to a country with a space programme and a nuclear industry, and which has publicly stated that it doesn’t want our money.

    Tax is theft, and the thieves are throwing away the money they steal like it is worth nothing to them.

    Is it therefore any wonder that the general population feel cheated? Is it any wonder that most people would rather do cash-in-hand deals and cut the taxman out of the loop entirely, thus saving themselves and their tradesmen the trouble of being legally robbed?

    Clean up the system, cease pissing away money on insanities like this and maybe then you’ll see less tax avoidance and evasion. Until then, the Government and the population are going to exist in a state of daggers-drawn mutual antagonism.

  48. David John Wilson
    Posted September 11, 2012 at 3:43 pm | Permalink

    National Insurance should be abandoned both as an employee and employers tax. Everyone who pays income tax should pay it at a higher rate that accounts for the loss of income from employees NI. This would thus include unearned income but an increase in personal allowance should be implemented to soften the blow for those on lower incomes and to persuade the unemployed back into work.
    Employers’ NI should be replaced by an increase in corporation tax. This would increase the cash flow of small companies and reduce the direct cost of employment thus hopefully reducing unemployment.

    • Richard
      Posted September 11, 2012 at 5:18 pm | Permalink

      DJW,
      A very good idea.

    • David Price
      Posted September 11, 2012 at 6:16 pm | Permalink

      So you would have those on a pension who don’t currently pay NI pay 50% more income tax?

      • AlexW
        Posted September 12, 2012 at 10:16 am | Permalink

        Mere optics.

        1. Merge income tax and NI.
        2. Tax pensioners at a lower rate to prevent them facing such a hike.
        3. Introduce a universal flat tax at the lower rate.

        Fixed it for ya.

        • David Price
          Posted September 12, 2012 at 6:24 pm | Permalink

          It is not mere optics, whenever the consolidation of NI with income tax has been mentioned there is no reference to those who don’t pay NI which includes pensioners and others, for example, those who live on their savings.

          Already things look more complicated than the simplistic “merge NI into a single 30% income tax rate and save billions on bureaucracy” ploy.

          Considering this as merely “optics” ignores the affect of unthinking policy on large segments of the voting public and is probably unwise given how badly pensioners and savers have already been disadvantaged.

  49. Credible
    Posted September 11, 2012 at 4:45 pm | Permalink

    John,
    What planet do you live on? Most people are not Mr A, B or C.
    £42,000 pension (solid platinum)! £72,000 from a company! £116,000!
    This is John Redwood world and not the real world.
    Most people earn considerably less. There are women in the workplace too! Most families need both parents earning to cover the mortgage pay for the cost of living. There is no spare income to use for tax-reduction purposes.

    I’ll explain taxes for ordinary hard-working families.
    Income tax, NI, VAT and Council tax of course.
    Then there is the soaring cost of travel by rail to work so that train operating companies can provide money for shareholders and not seats for passengers (1st class empty). Not to mention the cost of car fuel and bus fares.
    There is the soaring cost of gas, electric and water by private monopolies who again are making huge sums of money without adequate regulation.
    Soaring child care costs so that profit can be made out of working families.
    An extra £60 per year introduced in your constituency to have garden waste removed and a council that has the cheek to say they haven’t put up council tax. Not many houses in the Wokingham area don’t have a garden.
    The soaring rate of renting a house for people who can’t get or afford a mortgage.
    Inadequate resouces for the schools my children attend, which means fund raising is now for essentials – paid for by guess who, yes the parents.
    No doubt I’ll have to add mandatory private health insurance to the list in a few years time.

    Meanwhile the very rich (earning more than Mr A,B and C) and large corporations can find ways to pay very little tax and nobody in this government wants to do anything about it because these people donate to and control the Conservative party (although the Blair/Brown brigade didn’t want to do anything about it either).

    Not that I can moan to much personally as I have a good life and a decent income at the moment, but the sorts of things I’ve listed, although not direct taxation, are hitting many people very hard.

    Reply: I am discussing people at the top end of the income scale, because they pay most of the Income Tax. I did a long piece on why work, about people on low incomes, recently. I agree with the Coalition aim of taking people on low incomes out of Income Tax altogether. Today we are looking at a different set of issues. It does not mean I think these three people are typical, but they are amongst the main taxpayers.

    • Credible
      Posted September 11, 2012 at 9:49 pm | Permalink

      I’m not talking about people on low incomes. I’m talking about people on ORDINARY incomes. People who use their skills and work hard and are finding it increasingly difficult to deal with the cost of travelling, bringing up a family, paying for fuel or buying a house.
      The very richest may pay a large proportion of the income tax take, but as a percentage of their income they manage to pay a lot less than ordinary people and have no worries about the cost of living.
      If they paid what they should, perhaps taxes could be reduced for everyone else including Mr A, B and C.

  50. merlin
    Posted September 11, 2012 at 4:54 pm | Permalink

    When you are paid through the PAYE system you are actually taxed twice

    1) income tax

    2) national insurance – you could call it income tax 2

    The term National Insurance is deceitful and should be changed, it won’t be, of course, it reminds me of the following if it looks like a duck, if it walks like a duck etc. National Insurance is a tax. Furthermore National Insurance is even more misleading in that it gives the impression that there is a magical huge amount of money to insure the public against misfortune. Quite simply the money goes into an account and comes straight out to pay for Government Expenditure of various kinds.

  51. sm
    Posted September 11, 2012 at 5:59 pm | Permalink

    Inflation and Deflation is variable and is a tax.

    Inflation of the essential needs and deflation of fiat based cash savings in purchasing power terms.

    Some say with full reserve banking , the state could reduce taxation by creating the spending money debt free and managing the rate of inflation(money supply growth) directly. A few brave US Presidents have tried not sure if we had any equivalents in the UK.

    The banks could then just compete by matching borrowers with lenders and add value. Interest rates would be set by individual banks in competition with each other and with providers and users of finance. The banks would no longer be able to charge interest on ‘created debt money’ and would therefore have to work harder and pay less bonuses.

    They could also be allowed to liquidate with less adverse consequences.

    How about it and the banning of corporate donations and a limit on individual donations. Margaret Thatcher perceived the unions to be a threat to the UK , whats the difference between the unions then and financial power now?

  52. uanime5
    Posted September 11, 2012 at 6:24 pm | Permalink

    The 40% tax rate cuts in at a low level because the Government lowered it so people get less benefit from the higher personal allowances.

    Given that the personal allowance is removed at a rate of £1 for every £2 you earn over £100,000 can you explain how this results in a 60% rate of taxation when someone earning this much would pay 40% income tax and 2% NI.

    http://www.hmrc.gov.uk/incometax/personal-allow.htm#1

    You also forgot that all income between £34,371 and £42,484 is taxed at the 40% tax rate and 12% NI, while amounts between £42,484 and £150,000 are only taxed at 40% income tax and 2% NI. A problem the Government still hasn’t fixed.

    http://www.hmrc.gov.uk/rates/it.htm
    http://www.hmrc.gov.uk/rates/nic.htm

    • uanime5
      Posted September 11, 2012 at 7:23 pm | Permalink

      I’m surprise no one else mentioned that the Welsh exam board has decided to remark GCSE papers and is urging Ofqual to do the same. I expected several posts about this, how unfair it is that only English pupils were penalised, and why we need and English Parliament.

      http://www.telegraph.co.uk/education/educationnews/9534236/GCSE-row-grows-as-Welsh-pupils-are-re-graded-while-results-in-England-stand.html

      • zorro
        Posted September 11, 2012 at 9:39 pm | Permalink

        Yes, everyone should get an A or a B so that they can do whatever they want….Oh hold on, if that is the case, why bother having exams and just let them go to college if they want and save the pretence…..

        zorro

        • uanime5
          Posted September 12, 2012 at 6:36 pm | Permalink

          Everyone should get the grade they’ve earned. The Government shouldn’t be allowed to change grade boundaries for political reasons.

      • Lindsay McDougall
        Posted September 12, 2012 at 12:19 am | Permalink

        Actually, what we need is for the Welsh to do as they’re told. What idiot invented devolution?

        • uanime5
          Posted September 12, 2012 at 6:35 pm | Permalink

          Since when has the English bullying the Welsh been considered democratic?

      • David Price
        Posted September 12, 2012 at 6:15 am | Permalink

        As someone who has interviewed and assessed new hires in the past I fear you have things completely the wrong way round. It is the Welsh pupils who are being disadvantaged as the value of their exam results are diluted compared to the English ones.

        If such results are no longer a measure of true ability but only of attendance then they are of no real comparitive value to the employer who will need to find other metrics to select between applicants, say perhaps which country they come from…

        • uanime5
          Posted September 12, 2012 at 8:06 pm | Permalink

          Just because English pupils are getting a lower grade because of Government interference is no reason to punish Welsh pupils because their Government defended them.

          • David Price
            Posted September 13, 2012 at 5:03 am | Permalink

            English pupils aren’t getting lower grades, the overall grade distribution is being set to reflect performance. The Welsh government seems to want to give everyone an A for attending so what real value is their grading?

            Would you give all competitors in the Olympics a gold medal?

      • The Prangwizard
        Posted September 12, 2012 at 6:54 am | Permalink

        Is it not that a Welsh politician has ordered the remarking? A cynical way of gaining an advantage for himself and for Welsh kids over English ones. He’s beneath contempt. I heard Michael Gove in the House say time and time again that politicians should not mark exam papers. He is right, this Welshman is wrong, I hope he is seen for what he is. It’s about time we raised exams standards, they’ve been getting dumber and dumber for years. If I were an English employer I would treat ALL Welsh results with grave suspicion after this.

    • Mark W
      Posted September 12, 2012 at 4:34 pm | Permalink

      Over £100k you pay 40% so £2 of income is taxed £0.80p. You then lose £1 of allowance, adding a further £0.40p

      Thus £2 of income attracts £1.20 of tax

      That is why there is a notional effect of 60% tax.

      Typical Labour spite, wrapped in modern day subterfuge and not reversed by the Coalition.

  53. Jon
    Posted September 11, 2012 at 6:41 pm | Permalink

    One thing ‘d like to throw into this pot are stealth taxes, as much as an over complex tax system can cause many anomalies or quirks so can stealth taxes.

    I like the idea of simplifying it but hesitant about a flat rate without some tax mitigation incentives.

    Pensions just avoid double taxation, pensions are taxed as earned income so the relief is given during funding and swapping that around would just create more work for HMRC running two types along side each other for some decades with no additional benefit.

    We want people to save so people are not totally dependent on the state at retirement and it gives funding for the FTSE and gilts etc.

    I’m also unsure about a flat rate when it comes to the lower income groups. The earnings are less but that does not necessarily reflect their value to society, having the workplace cleaned and the lights replaced is important even if it doesn’t pay well. Not unsolvable if personal allowances are still used and tapered off.

    I think whats been woven is so complex that its hard to get my head round what the end consequences are of each of these complexities being removed at once would be let alone put together. Also the nature of parties is to campaign on what they would do so once simplified I think it could quickly return.

    Governments do piecemeal amendments but there is no real overriding structure to the whole thing.

    I like it, it needs lots of simplification but not the whole lot. It needs just a small number of central pillars, a structure that future tax reform can work within. Like corporation tax, savings, income, products and services . Each one having a desired outcome to be achieved both in revenues, simplification and fairness and tackle each one from there.

  54. Jon
    Posted September 11, 2012 at 6:54 pm | Permalink

    cont… I think there could be cross party agreement for re-structuring the tax system into a much simpler form for category. Each incoming government still having the levers to raise or lower tax in each one but without this complexity we have at the moment.

  55. Jon Burgess
    Posted September 11, 2012 at 7:42 pm | Permalink

    As you have alluded to, the UK tax system is too complex. Complexity exposes loop holes and loop holes encourage avoidance.
    Reduce the complexity and the avoidance reduces. Reduce the rates and the tax take increases. This lesson was learned by your party in the 80’s but looks like all those fancy schools and degrees haven’t enlightened your front bench. Perhaps Mr Lawson could give young George some extra tuition in the evenings?
    This will do far more to encourage growth than what your lot are doing, as you well know, but we are forced to endure socialism for ever more, whatever party is in charge.

  56. Alan Radfield
    Posted September 12, 2012 at 6:03 am | Permalink

    The government steals as much money from the citizens of the country as it can. Firstly, to pay it’s own members nice salaries and pensions, and secondly to throw enough crumbs to enough other people to buy votes in order to maintain their power and priviledges. This proces is self-feeding and results in an inexorably larger state. Obligations like fixing the road network, the economy or building airports don’t even come into it.

  57. David Price
    Posted September 12, 2012 at 6:51 am | Permalink

    So what is the ideal? I don’t mean just tweaking the existing system such as dropping NI and increasing income tax which is often presented as neutral but penalises non NI payers.

    If you were to start from scratch what would the tax regime be and how much would I have to pay? Alternatively, is there an existing system which we could simply copy (and so provide no leeway for overcooking the size of HMRC employees)?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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