Tax system

[Cupcakes2024]

Watching some of Jamie dimon from JP Morgan and chase bank, speech's and one point he advocated is rather than tax the rich to raise taxes is instead its better to have a balanced tax system , basically is Jamie correct ?

You still havnt taken on board my common example/illustration that you quoted and keep going off on a tangent. Interest and dividend income for pensioners is very common and something that financial advisers work towards when retirement planning because of the tax breaks. Alongside of course tax free ISAs.

This ^^ -
So many people fail to understand that everyone with an income above the personal allowance (except if it is non-taxable benefits ) will pay tax on that at the same rate as everyone else.

The state pension is a TAXABLE benefit

In addition a pensioner on £18.5K pa will pay council tax, VAT etc

No they don't. Firstly NIC is a tax that is only charged on working age workers' wages. Secondly, there is an extra £6.5k of income (interest and dividends) that is tax free for people whose total income is under £19k. So, say, someone deriving their income from interest and dividends can have an income of £19k before paying any income tax, and of course, no NIC on interest and dividends. So, "tax free" unearned income compared with tax and NIC on people deriving income from wages at the same levels, i.e. yet another tax on workers and a tax free initiative on "wealth", even at much lower levels! Not sure why non workers living on investments should have an effectively higher "tax free" personal allowance than workers who are actually doing something productive for the country!

Along with tax free ISAs where people could have a few hundred thousand of investments "tax free", with careful planning, you could be almost a millionaire and not pay any income tax nor nic, because with various tax breaks, you could happily live on enough interest/dividends all exempt from tax and NIC. Minor rules introduced a couple of decades ago to encourage savers have been hijacked with people with lots of money to invest to cause another group of people not actually paying income tax/nic despite having the same income as workers who are being crushed by the PAYE system.

I haven’t gone off on a tangent at all. A pensioner with an income of £18.5k is extremely unlikely to have ever had the money to derive an income from investment or to be in a position to require a financial advisor. The £8k they get over and above their state pension is almost certainly the result of an occupational pension, not a return on investment. You’d need to have about £200k tucked away to generate £8k and anyone with that kind of money would almost certainly also have an occupational pension and a substantially higher income. Of course tax free ISAs are available at any age.

@blossomtoes @ruby1957

A worker on £18.5k assuming no student loan or pension contributions = £1,393pcm taken home.

A pensioner on £18.5k (ditto on assumptions) = £1,443 a month take home.

This is because they pay less tax, via being excluded from payment of NI.

Personally I think pensioners should be paying NI. NI goes towards public services and specifically the health service and welfare, as well as state pensions.

Older people are the heaviest users of the health service before you even think of the cost of social care and there are more older people relative to working age people than ever before. Most are also living longer (also meaning they claim their state pension for more years… hence pension age has gone up) and with more complex (therefore expensive) conditions than in the past. That’s why the system is breaking. When today’s pensioners were paying NI as workers, it was being spent on a much smaller population of pensioners who typically didn’t live as long.

There is no rational argument that says pensioners shouldn’t be contributing to public services and the welfare system through NI in today’s economy. It’s purely political.

However, younger people will be paying national insurance AND student loan (9%). Paying an additional amount, in effect another tax, for 20-30 years was not the experience of today’s pensioners. I’ve only just paid off my student loan and I’m in my 40s. Now I’m forking out for rent for my eldest, soon to be joined by my youngest. So that’ll be THREE sets of housing costs.

I guess one could easily comment that pensioners have already paid their fair share.

Only they probably haven’t. Drugs at a few grand a pop, staying in hospital at a few grand a pop, x-rays, many blood tests, cancer treatment, hip replacements, pacemakers, care home fees/home carers (if not self funding), add up to tens and tens of thousands of pounds cost to the NHS. Completely unsustainable and a huge huge burden on younger working people who are simply trying to get by, bringing up children. Like with student loans, today’s pensioners did not have those kinds of costs to bear when they were young and supporting the elderly population of the day. Medical costs are one of the reasons the U.S economy is constantly on the verge of imploding,

It’s not current pensioners’ fault. It’s just that the expectations and costs of providing healthcare for the elderly have risen exponentially and taxes can only rise so far before we end up having to forgo investment in new roads, schools, technology etc.

It’s not current pensioners’ fault. It’s just that the expectations and costs of providing healthcare for the elderly have risen exponentially and taxes can only rise so far before we end up having to forgo investment in new roads, schools, technology etc

@HFJ yes I agree with this, there is also only a finite extent to which you can tax workers’ income and I don’t think we are far off the limit. The chart above re sources of tax revenue is spot on, it can only come from income tax, NIC and VAT.

There are other anomalies in the system too which disadvantage workers but I’m not here to go into them. My points simply is that everyone should be paying NI, and I personally think everyone should be paying CGT on homes too. At the end of the day they’re nothing but a financial asset (as much as we love them).

I suppose it depends what you’re trying to achieve - a “fair” system, the system that brings in the most money etc etc. Technically speaking the only “fair” system is everyone pays the same percentage, that way those with the highest income pay the most and vice versa. Taxing wealth is often stated as the answer but I’ve no idea how that would work in reality. For example you can be asset rich but cash poor, eg have a huge old house in disrepair because you can’t pay for the upkeep, so how do you tax that? If you have to sell the asset to pay the tax you no longer have the asset against which the tax is levied.

@brunettemic

Taxing wealth is often stated as the answer but I’ve no idea how that would work in reality.

We could start by charging the same tax rates on income derived from "wealth" i.e. rental income, occupational pension schemes, interest and dividends, at the same rates as income derived from wages, i.e. the same 20/40% income tax rates AND national insurance! It's bonkers that taxes on unearned income (from wealth) is less than the same amount of income from wages. A real disincentive for workers and an illogical "benefit" for richer people, i.e. those with good pension schemes, properties to let out, large amounts of savings and investments etc. It would also be an easy fix, just to scrap the extra incentives on income from wealth, i.e. the personal savings allowance, zero tax rates for interest/dividends, reduce limits for ISAs and impose a lifetime limit to stop ISA funds getting into the millions, and either charge NIC on all incomes, or scrap it and increase income tax rates instead. Or we bring back higher income tax rates (and/or no personal allowance) for unearned income from sources other than wages.

Someone with an income of £50k, from pensions, interest, dividends, rental income, etc should pay at least the same tax as a worker on £50k - not a few thousand less!! In fact, preferably more as they are clearly "rich" if they have an income of £50k without working as it must be from investments/wealth!

@PoppyAndParsnip

and I personally think everyone should be paying CGT on homes too.

I certainly think we need to reduce the exemption on main residence relief - maybe make half the gain exempt, or a percentage for each year of ownership, i.e. 10% for each year, so if you need to keep it as your only main residence for at least 10 years to get full exemption. Or a minimum period of living it of say 5 years before it becomes exempt, etc.

Or make it a "rollover" relief, where the gain is "rolled over" if you sell it and buy another "main residence/home", and so on, until such time as you start to downsize or use it for something else (i.e. let it out), at which point the accumulated gains come into capital gains tax.

Far too many people are abusing it by "manufacturing" their circumstances to avoid CGT, i.e. people constantly buying a wreck, doing it up, selling it for a whopping profit, and then doing the same again and again, i.e. it being an actual "business" rather than just doing up a run down house to live in.

At least the CGT exemptions for "homes" that were then subsequently let out as buy to lets has been tightened up, so that's a start anyway!

Not really - income from employment is subject to NI (including employers NI).
Dividends aren't, which is a major saving.

I think governments have looked at this and found it very complicated to achieve. The biggest barrier is how to work out entitlement to state pension.

Also for each well off pensioner who could manage a 12% increase in tax rate, there are many who could not. A reasonable starting point would be to apply it to all income received by people under 70. For the majority, this would make little difference.

National insurance is primarily paid by employers.

Dividends are paid from taxed profits (taxed at between 19 and 25%) and then subject to dividend tax (8.75% for basic rate taxpayers; 33.75% for higher rate) as well. So there’s little difference between the rates for basic rate taxpayers especially now NI has been reduced to 10%, and for higher rate taxpayers the rate is higher on Dividend income than on employment income. And in order to get Dividends, an individual must have invested in a company (which isn’t without risk), and I think we shouldn’t discourage investment.

I do think we should levy NI on pension income, even though I’d be a bit miffed since I am nearing retirement age. It will be so unpopular though, that I can’t see any government introducing that.

I also don’t understand why NI is levied at only 2% on earnings above the higher rate threshold. So lower paid people are paying effectively higher rates of NI.

Probably also worth pointing out that there is also the cost of accounts compilation for a small business, as well as the benefits of NI.

For example limited companies and people paying themselves dividends did not benefit from the same largesse that salaried people did during covid.

I think there was some sort of 2k allowance for NI though in a small business. But only if there is more than one employee IIRC.

and for higher rate taxpayers the rate is higher on Dividend income than on employment income.
You appear to be arriving at that by adding corporation tax and dividend tax and defining that all as income taxation - presumably on the basis of a single person limited company (a fairly narrow use case); but people who have income solely derived from dividends aren't taxed at anywhere near PAYE rates.
Also in the case of limited companies of this kind, no NI is payable, not Employer or Employee NI.

I know this from previous experience of actually running a single person limited company.

For example limited companies and people paying themselves dividends did not benefit from the same largesse that salaried people did during covid.
I am personally very well aware of this - the combined effects of it and the IR35 changes led to me having to close my Limited company and get a regular job - arguably what the government intended, Rishi is fine with his 20% tax rate but he didn't like it when little people like me were allowed to be self employed.

Targeting sole directors is nuts. There’s a risk to setting up a business and tax is already sizeable

We could probably have enough tax if state dependency was lowered.

Taxation is way too complex.
People who derive income solely from dividends aren't taxed as much as people with income from PAYE jobs.

@Jovacknockowitch, the money is still taxed at that rate. The individual may not perceive it that way, but the fact is that they have to invest money somehow in order to get that dividend income, and the money has been taxed. Discouraging investment is a bad thing IMO.

Single director companies no longer benefit from employment allowance BTW (this was changed several years ago), so they do have to pay e’ers NI if taking a salary over £9,100. Directors also pay e’ees NI on salary over the £12,570 threshold just like any other employee, so I’m not sure where you’re getting the idea that they don’t pay NI from.

Dividends suffer an extra 8.75% personal tax, on top of the 19/25% corporation tax already paid, so there's really not much difference these days. The extra 8.75% approximates to the NIC.

You'd have the same £12.5k threshold as for wages, so it would only be payable by those with over £12.5k from each pension scheme, in the same way someone can have 2 part time jobs each earning £25k and not pay any NIC whereas someone with 1 job earning £25k pays around £1.5k in tax. The aim would be to target the wealthier pensioners, not those on low incomes!

If NIC was scrapped and income tax increased instead, again first £12.5k tax free, but we wouldn't need to increase income tax by the same 12% nic rate as it broadens the taxpayer base, so would probably only need to go up from 20% to maybe 25% to bring in similar income, but would be a massive help to low/middle paid workers.

Sole directors have already been targetted enough over the past decade or two, and the tax advantages (brought in by Brown!!) that encouraged the stampede of sole traders to convert to limited companies have now been dealt with and removed. Personal tax on dividends, IR35, removal of NIC employer's allowance, removal of tax relief on capital gains on incorporation have all got rid of the stupidity of Brown's tax breaks for small limited companies. There's nowhere else to go now - all the "loopholes" have been plugged. A sole trader with, say £25k of profits now pays a very similar amount of tax to a one man limited company earning profits of £25k. In fact, with the recent corporation tax rate hike, a "one man" business, earning say £75k profits is actually worse off as a limited company and many are now converting back to being sole traders!!

so they do have to pay e’ers NI if taking a salary over £9,100. Directors also pay e’ees NI on salary over the £12,570 threshold just like any other employee, so I’m not sure where you’re getting the idea that they don’t pay NI from.
There's no reason and certainly no incentive as an individual director to take a salary over £9000 though. Directors aren't subject to NMW so they can make most of their remuneration from dividends if they wish, quite legally.