to think we need to scrap National Insurance and increase income tax to pay for it

[AgaPanthers]

For a basic rate tax payer to receive £68 of net wages costs an employer £113.80 (£100 plus 13.8% employer's national insurance, minus 20% income tax, minus 12% employee's national insurance)

This is an effective tax rate of 40.2%. AIBU to think that this is little more than a trick to say we have 20% income tax, when in fact the tax on earned income is at least 40%?

Yes I agree, I've been banging on on the same theme to anyone who'll listen for several years.

I'm a little surprised to see it advocated here, as I think making it more obvious to people just how heavily they are taxed would suit a right-wing agenda, and I think Mumsnet leans left.

Some people will deny that employers NI should be counted. They are wrong, they lack understanding of economics, I think.

So at the moment you have these effective tax rates for a basic tax payer:

• salaries - 40.2% (advertised as 20%)
• dividends - nil (but the company pays Corporation Tax on the profits)
• capital gains - 18%
• savings - 20%

And these for a higher rate tax payer:

• salary - 49.0% (advertised as 40%)
• dividends - 25% (plus Corporation Tax on the company's profits)
• capital gains - 28%
• savings - 40%

Projected tax receipts for 2013-14

Income tax - total £155.668 billion
Income tax - PAYE £134.686 billion
Income tax - self assessment £20.903 billion
NICs - £107.769 billion

Others (ordered by size)
VAT - £104,532 billion
Corporation tax - £41.498 billion
Petrol tax - £26.881 billion

Others all sub- £10 billion

Payroll taxes (NICs + Income Tax) are about half of the total, because they are an easy target. Which is understandable. But at least be honest about how much we are paying!

So you would make the basic rate of income tax 40% and the higher rate 49%. And introduce a savings tax rate of 20%, though the shitty 0.5% base rate is far damaging than income tax at the moment.

Bear in mind that the corporation tax rate is now down to 21% and you can see how iniquitous our payroll taxes are, because by not paying a salary (taxed at 40% or more), you can pay a dividend out to a shareholder (often in lieu of salary) at only 21% tax.

Income in the basic rate band is taxed at near-40%, that in higher rate at somewhere near 47% I think, so there isn't much difference between a basic-rate taxpayer and higher-rate, for people who get income from employment. (Pensions, investment and even self-employment income has more of a difference.)

I think in the long-term we should simplify and have a single rate for everyone that brings in the same amount of income. Let's say 50% with an increase to the personal allowance so people aren't worse off, on average. (In other words, the total tax take stays the same.)

People who have non-wage income shouldn't be impacted immediately as that would be unfair, but, for example, you could put the rate for pensioners up from 20% to 50%, but also give them a much higher personal allowance so that on average they were no worse off, but then leave their personal allowance frozen at that level while inflation gradually increases the allowance for working people until the two can be synchronised. This would take decades, but that's fair, as current pensioners have a reasonable expectation of lower taxes in retirement.

Sorry, x-posts. My estimates for the burden of tax are a couple of percentage points lower than yours due to personal circumstances in my spreadsheet, I think yours are more generally correct.

I am a big fan of getting rid of NI as a way of raising take home pay for people on low wages. It would no doubt boost the economy putting more money in pockets of people on low pay who would immediately spend it.

Employers NI needs to rise to compensate and corporation tax as well. Collecting a proper amount of corporation tax would be a good thing as well.

Sorry - i don't think i'm quite following you, I've always understood my contributions, as a low income worker, to be around 32%, the extra 8.2 you have added is the employers contribution, yes - it's not a tax on me, it's not like my employers would give that money to me if they didn't have to give it to a government...

I disagree.

It's hard enough to amass a pension, and would be very bitter to see it more of it vanish in tax.

Aren't we already one of the highest taxed countries in the world?

"the extra 8.2 you have added is the employers contribution, yes - it's not a tax on me, it's not like my employers would give that money to me if they didn't have to give it to a government..."

Eh? Why wouldn't they?
There's no difference at all between the employer paying £113.80 to give you £68 and them paying £100 to give you £59.8.

And it's not 8.2%, but 13.8%.

They would add it to their profits rather than give it to their workers if HMRC suddenly excused employers from their NIC contributions.

As I said, I don't think I really understand the numbers.

"Aren't we already one of the highest taxed countries in the world?"

No. Not even close.
en.wikipedia.org/wiki/List_of_countries_by_tax_rates

Employers would pocket anything they got in government handouts / tax reductions. But that's moot if there is an assumed stable tax take.

I know it is a Tory policy but done right I see no harm. It could be good to make the taper more fair. So reduce the overall basic rate tax, from 40% to 30% keep a mid point around the 47% Mark and put all over £100k on an absolute tax rate of say 55%

Seems fairer (& I would be on the high rate)

Yes I agree and I think we need to go further. I think the whole system is mad: the tax code, the benefits system, everything. More and more I'm leaning towards a Basic Income system with a flat tax on all earned income and just scrap the lot. Scrap benefits and minimum wage and hours restrictions (not individually or collectively bargained agreements) and everything and just make everybody economically independent enough to make free choices --walk out of any job they don't like. The (massively reduced) tax code complexity would be focused on corporations and broadly discourage the accumulation/stagnation of assets.

I feel weird saying this as a lifelong lefty but I just think what we're doing doesn't work.

Flat tax is unfair.

The way to get rid of employers NI with the least disruption, if we have a single payroll tax, is to rename it as employers income tax contribution. It then counts both as part of taxable salary and as a payment of tax on the whole salary.

As a rough example with figures that only aren't quite accurate, if you have a contractual salary of 40K on which 4K employer NI is due, your taxable salary would be 44K but 4K tax would be considered already paid, so if the tax rate were 50% on the amount above a 12K personal allowance, the remaining tax might be something like (44 - 12) * 50% - 4 = 12K.

This would leave the employer, employee and HMRC with about the same amount as they get under the current system, but it would be much clearer how much tax was being paid.

They would add it to their profits rather than give it to their workers if HMRC suddenly excused employers from their NIC contributions.

I could give you a long economic argument why, on average over a period of years, things would even out so employers were no better off, however see my post just before this one which shows how we could sidestep this whole issue.

Flat tax is unfair.

Currently (for people with employment income) the real basic rate of tax is roughly 40%, and the real higher rate just under 50%, so we're not that far from a flat tax at the moment. It's just that we have the smoke and mirrors of National Insurance preventing people from realising how much tax they pay on income in the basic rate band.

I don't understand economics so I won't pretend to be able to add much of any use to this discussion, but if we scrapped NI then how would people like my Mum, who was a SAHM living off my dads income for a number of years protect her pension contributions? She paid her 'stamp' so that when the time comes she is still entitled to a full state pension, would something like that still be an option?

I'd like to scrap employee NI and increase VAT to pay for it.

But if you get rid of NI and add it to the income tax bill, the burden of taxation would change. NI and tax have different profiles - different lower thresholds and N I has an upper threshold. To match the current profiles would take some serious arithmetic. Or to use a different combined profile would change how the comparative burdens fall - which has knock on effectes for all kinds of behaviours and other aspects - eg calculation of tax credits, other tax relief etc.

I'm not saying we shouldn't do that - just saying it's complicated.

More and more I'm leaning towards a Basic Income system with a flat tax on all earned income and just scrap the lot. Scrap benefits and minimum wage and hours restrictions (not individually or collectively bargained agreements) and everything and just make everybody economically independent enough to make free choices --walk out of any job they don't like.

Yes this is my ideal to. I don't think we could go all the way towards it, as scrapping the complex benefits system we have would create to many hard cases of people who really should get more than the basic income. However we could evolve towards the ideal. Administratively, working people with high enough salaries could get their basic income in the form of a personal allowance. Universal credit in its current form might still exist ( to handle the complex cases) but the basic income would be offset against other benefits people might be eligible for, meaning some people would no longer claim Universal credit as they wouldn't get anything extra.

I would also like to see the Universal credit system re-jigged so that benefits are on a per-person rather than per-household basis, so it made no difference to your benefits whether you lived alone or with someone else.

If you find a way to scrap NI, then you also get rid of most of the tax planning opportunities that the Government (and most tax payers) hate. If you could just find a way to make a flat rate of income tax stick, then there is no advantage from using a company, a partnership/LLP, employment or self-employment, and a huge chunk of the tax legislation would fall away. It is the only way to effectively simplify taxation.

But, trying to find a flat rate that would not give an unacceptably high rate is tricky, particularly when you factor in the employers NI.

I work in tax, and I was surprised to see that NI was the second biggest earner for the govt (I did already know that before today) and I think most of my colleagues would think the same. It gets a lot less attention than it should do.

The NI office is also the hardest bit to get answers out of , and seems to be almost unaccountable.