CinnabarRed's tax thread

[CinnabarRed]

This may be an act of supreme arrogance on my part - if so, I apologise profusely! But it seems that a lot of people have got questions about tax policy and the morality of taxation, which is my professional field.

So this thread is your chance to ask me any questions you have in this general area. I promise to explain what I know, be honest and clear when I don't know the answer, and distinguish between facts (for which I will provide a reference) and my opinion.

So over to you! I'll be back in the morning to answer any questions posted tonight.

PS: I won't be providing taxation advice to anyone!

Argh.... Points 1 and 3 justify high pay... Point 2 doesn't justify what they get to cream off. And point 4 and historical precedent explain the rest.

Rabbitstew - don't you hate it when bad things happen to good posts?

Aw, thank you, CinnabarRed... I like my rants to be thought of as good posts.

I'm going to be online this afternoon for the Budget. I'll be pretty busy (I'm on maternity leave but working today in my firm's press room) but will try and pop by to answer any questions.

Oooh. A couple in advance of the budget: do you think this Government will be any better than any previous governments at closing tax loopholes? And what is your view on cutting the 50% income tax rate band (assuming this is going to be done)?

I think both this and the last government are pretty good at identifying loopholes (the disclosure legislation, which obliges tax planners to disclose their schemes to HMRC before they are full implemented, has been incredibly effective) but terrible at drafting a sensible legislative response. They have generally either drafted very narrow solutions which can be readily sidestepped, or ridiculously wide solutions which catch entirely innocent situations. Personally, I'd like to see solutions with more thought put in.

I'm 100% certain the tax rate will fall from 50p to 45p, and I also think it's the right thing to do. For many, paying more than half each additional pound earned in tax is psychologically restricting. I would be staggered if the 50p tax rate has actually raised any revenue. But it must be cut from 2012 rather than 2013, because otherwise the wealthy will simply defer bonuses and dividends until 2013 and that would create a shortfall for the Chancellor.

Relatively few of the measures will add up to significant amounts of cash, whether given away or raised.

The single biggest item is the inflation busting increase to the personal allowance from April 2013 (from £8,105 to £9,205), which will cost the Exchequer around £3.4 billion from 2013/14 onwards.

The other big winners are companies. Their tax rate will drop an extra 1p from 2012/13 to 24% (and then 23% from 2013/14 and 22% from 2014/15). The long term plan is to get to a 20% rate. This will benefit corporates to the tune of around £900 million per annum.

How will these give-aways be funded? As usual, from the banks and the oil companies. The banks will pay via a 0.105% increase in the bank levy, forecast to raise around £450 million per annum. The oil companies via the introduction of ?certainty? over the tax consequences of decommissioning, which sounded like a sensible measure to stimulate exploration when the Chancellor announced it but is something of a poisoned chalice in light of the Red Book?s forecast that it will raise around £300 million per annum.

The elderly will also pay more tax due to the phasing out of age-related allowances. ARAs will be frozen at their current level until they?re in line with the personal allowance, and will mean pensioners will pay £1 billion more in tax once the full effects kick in. Somewhat mystifyingly, the Chancellor badged this change as a Good Thing as it will make the tax system easier for them to understand, the poor dears.

As had been widely trailed, the 50p tax rate will decrease to 45p from April 2013. The Chancellor announced that it had caused massive distortions ? a staggering £16bn of income was shifted into the tax year prior to its introduction, and only raised £1 billion (which was largely offset by the effect of the foregone income). Indeed, HMRC has estimated that the 50p rate only raises £100m more per annum than a 45p rate would, but with far more damage to the UK economy.

The Chancellor has also got himself exercised over Stamp Duty Land Tax avoidance by the mega wealthy. For a start, there will be a new rate of 7% on the sales of residential properties of more than £2 million. Even more dramatically, where individuals seek to disguise transactions of residential properties in corporate vehicles then the SDLT charge will be a whopping 15% (and there will be a large annual charge on £2m plus residential properties that are already in corporate vehicles).

CinnabarRed - 50% isn't more than half, it IS half, so I personally don't see it as psychologically restricting or a level so swingeing that it will send all wealthy people running for their yachts in order to escape these shores forever. I agree anything over 50% feels different, somehow... But doesn't your point about deferring tax just go to show that cutting the rate now means no-one will ever actually know how bearable wealthy people might have found a 50% rate (over and above the lower rates, on which all people are taxed the same amounts for those tranches of income, so it's not as if the most wealthy pay more tax on all of their income), since it hasn't been around for long enough for anyone to know (ie has been around for so short a time that people could well have been betting on an imminent fall in the tax rate and therefore adjusting their behaviour in that fairly confident expectation, knowing they were safe one way or the other because the rate was never going to go up and was almost certainly going down)????? I was hoping you would compare the rate with other countries and provide some statistics or examples of the effect of 50% rates on the most well off in other countries, rather than express a personal opinion without any evidence to back it up, as though it is an immutable fact of human nature - in good times and bad times, utterly oblivious to its environment. I know the OECD thinks 40% is the optimal tax collecting rate, for example, but have no idea how they calculated this or in what economic conditions the data was collected, or what they did about countries that appeared to fall outside the norms in terms of tolerance for tax collection (you can't, after all, compare attitudes in Greece to those in Scandinavia very easily, as the mentality to tax in both countries appears to be entirely different).

So, I'm still confused as to how you can be so confident in your opinion on this.

More than half comes from adding on NI contribitions, so you're actually paying more than 50%, depending on how much you earn. (IIRC it's 12% on money earned up until the HRT cut off then 2% on anything over that). So if you were paying the highest rate of tax then you were actually losing more than half of anything earned above the cut off point.

Rabbit - it isn't just the 50% rate, but the withdrawal of the tax free allowance at that level as well, plus the NI, so it comes to more than 50%.

Thanks, clytaemnestra. So at 45% income tax, you would be paying less than 50% tax on your income including NI contributions? That makes much more sense to me, now.

ps how do employers' national insurance contributions work? Are they a fixed % rate whatever the income, or do employers' contributions vary depending on the salary being paid? (Never having been an employer, it would be very interesting to know how this side of the NI coin works - is it as hugely complicated and obscure as other tax?).

Thanks scaryteacher.

50% tax, plus NI, plus loss of personal allowance always felt over the tipping point to me.

Don't get me wrong I don't pay my tax bill with a grin, but when it was 40% I felt it was okay. Fair.

When it tipped to more than half of each £1 earned, it felt unfair. Paticularly as DH and I both lost our allowance too. It felt like a punishment.
I can quite see how that sent people scurrying off to avoid it.

Whether 45% is enough to get those people back in the system again, I dunno. It's still high.

I have to admit, I have never really wanted to know exactly how much I am paying in tax - always felt slightly annoyed to be given the VAT exclusive price when I knew that wasn't what I had to pay; tried very hard never to look at the deductions on my pay slip and only looked at the net amount; didn't want to know the gross amount of interest being paid on my savings if I couldn't get them tax free in any event; found it vaguely annoying if it was suggested to me that I could structure things in a more tax efficient way. If I ran my own business and needed to be very tax efficient in order to survive (and mainly wasn't the end payer of VAT), I am sure some of that would spill over into the way I viewed my personal tax bill, too. Also, I suppose the less my tax money seems to be going towards things that I perceive to be good for society as a whole and which create some sense of community and shared enterprise, the less I will be willing to view things that way - when I no longer see the State as well meaning and relatively uncorrupt, I will probably avoid tax as much as possible.

Blimey - was just looking on HMRC website at "National Insurance for Employers: the Basics." It doesn't look very basic to me.

So, how has tax ended up so complicated? Is it because we don't go for a "spirit and intendment" approach to the interpretation of our tax laws? Or because life will always be too complicated for simple tax laws to be possible? Or because simple always ends up meaning transparent but unfair? Or because it's easier to collect tax if everyone is very confused by it?!...

Oh, and I do remember getting more interested in the tax I was paying when my coding notice didn't correspond with the information I had put into my tax return. I don't object to paying tax, provided it is collected efficiently and calculated correctly!...

Tax has ended up so complicated because one G Brown, aided by one Ed Balls, made it so. We went from a relatively easily understood system to a labyrinthine system which requires a degree in doublespeak to navigate one's way around. I wanted some simple answers about IHT and CGT last year, and ended up having to call HMRC as I couldn't find what I wanted from what was on their website (and I spent years immersed in the LGFA for CC and CTAX and can read legislation fairly well and used to be a TOHG in my very much younger days).