When asked why he robbed banks, the US criminal Willie Sutton is said to have replied “because that’s where the money is.” A similar type of response is often applied to the issue of raising tax revenue: tax the rich because, by definition, that’s where the money is (Investment Manager Bristol).
The argument has been supported in the USA by growing income inequality – hence the campaigns against “the 1%” who, on some accounts, globally own as much as all of the other 99%.
A UK Perspective
In this country, the well-respected Institute for Fiscal Studies (IFS) has been examining the pattern of tax raising and how it has – and will – change by 2020. The Institute’s findings may come as a surprise to the tax-the-rich lobbyists, but may not to you, especially if you already pay tax at more than basic rate.
The IFS found that up until the financial crisis in 2007, the proportion of income tax paid by the top half of taxpayers had increased, but mainly because their earnings were rising faster than the population’s as a whole. The booming financial sector – think bank bonuses – was an important factor. However, the picture of increasing income tax share did not change once the crisis hit. As the IFS notes, what had happened simply as a result of earnings inertia until 2007 became a deliberate government policy thereafter. For example:
- The top rate of tax was increased to 50% in 2010/11 (and subsequently reduced to 45%).
- Child benefit was brought into tax for those with incomes above £50,000 and child tax credit restricted to low/medium earners.
- Pension tax reliefs were systematically cut back, with the latest reduction to the standard lifetime allowance having just taken place at the beginning of this tax year.
- The starting point for higher rate tax has been regularly manipulated with the result that the 2016/17 threshold (£43,000) is still lower than the figure which applied seven years ago (£43,875 for 2009/10).
- The personal allowance has been phased out for those with incomes of over £100,000.
- Tax thresholds which affect the wealthier element of the population have been deliberately frozen – the additional rate of tax still starts at the same level as it did when launched, as does the taxation of child benefit and the phasing out of personal allowances. Similarly, the inheritance tax nil rate band of £325,000 has also been frozen since April 2009, with part of the justification for the freeze being reform of long-term care funding which was subsequently deferred for four years, shortly after the election.
The current and previous government made much of the increases to personal allowances and these have been costly in terms of Exchequer revenue. The IFS says that 56.2% of the adult population were taxpayers in 2015/16 against 65.7% in 2007/08. Even so, that smaller proportion is still producing much the same share of the Treasury’s income as it did eight years ago.
The Higher Rate Threshold
The Chancellor has a target of raising the higher rate threshold to £50,000 by the end of this Parliament (ie 2020/21). However, even if he introduced that figure today, it would still not match what price indexation – the old basis of increases – would have produced. There is some sleight of hand here, too. The higher rate threshold also sets the upper limit for full rate National Insurance contributions (NICs). Thus, if you are a higher or additional rate taxpaying employee, the 20% tax saving that an increase in the higher rate threshold gives you is halved once you take account of the fact that you will be paying 12% NICs on the increase element rather than 2% - and now getting no additional state pension benefit for doing so.
ACTION
The rich – and not so rich – are paying more tax and, whatever the politicians say, that will continue to be the case.
The corollary is that tax-planning has become all the more important. If your tax plans have not been reviewed in the light of all the recent tax developments, you could be paying even more tax than you need to.
Investment Manager Bristol And Financial Advice Bristol
If you would like to speak with one of our Independent Financial Advisors and potentially receive financial advice, please contact us on 0117 923 7652. We are based in Clifton, Bristol but we are happy to service clients from across the UK and we provide free initial meetings at our client’s convenience.
Churchill Wealth Management Limited is located at 13 Alma Vale Rd, Bristol BS8 2HL, United Kingdom.
About Us: Churchill Wealth Management is a team of independent financial advisors/financial advisers (IFAs) based in Clifton, Bristol. We provide independent financial advice, including pension advice, investment advice, inheritance tax planning and protection/insurance advice.
