low paid, pensioners, savings and tax

ColdIron

zagfles wrote: »

it's always been a tax on a tax, ie it's taxed income people save so why should they pay tax on it again

They don't. You pay tax on the original sum and then any interest generated with that is taxed. The original sum remains untaxed

gadgetmind

Look no further than council tax for a tax that's paid out of fully taxed income.

zagfles

ColdIron wrote: »

They don't. You pay tax on the original sum and then any interest generated with that is taxed. The original sum remains untaxed

But the amount of interest you earn is less because you're investing taxed income.

Take an example. Say you could invest £1000 pre-tax, and were taxed at 20% on what you actually get including interest.

Say you earn 10% interest. Pre-tax, the £1000 grows to £1100, you pay tax on the whole lot, so you pay £220 tax leaving you with £880. You've paid tax on the entire amount including interest. So the interest has been taxed.

Now see what happens when you invest post-tax income.

You pay 20% on the £1000, so only have £800 to invest. You invest that £800 and it earns 10% getting you £880. But you now have to pay tax on the extra £80, ie £16, leaving you with only £864. You've been double taxed on the interest.

Of course there are other taxes on top of taxes eg income tax and VAT - but with interest it's double income tax, ie income tax on income tax.

And of course when the interest you earn is below inflation that adds insult to injury - your investment has lost value yet you have to pay tax on it - that's a wealth tax pure and simple.

Eco_Miser

zagfles wrote: »

As for this savings tax, why not just abolish all tax on savings, at least for basic rate taxpayers?

Some basic rate taxpayers have large savings income (includes gilts and corporate bonds) which might take them into HRT unless the tax were abolished (and if it were, there would be even more as rich retirees arranged their affairs to take advantage).

zagfles wrote: »

After all how many basic rate taxpayers are going to save over £15k a year (ISA allowance),

It's not how much you save per year, but how much you've accumulated that's important.

zagfles wrote: »

and it's always been a tax on a tax, ie it's taxed income people save so why should they pay tax on it again, particulary when rates are generally lower than inflation.

It's basically a wealth tax at the moment - the real value of most people savings aren't rising yet they pay tax on it if it's not in an ISA...

It's not a tax on taxed income (unlike VAT and council tax), but on further income generated by taxed income.

Archi_Bald

How do you suggest the country raises the taxes that are needed to pay for the social infrastructure of the country in your "tax only once" world?

There would only be 2 alternatives - cut the services back to the available money, or 2) raise income tax.

Neither alternative would be terribly popular, don't you think?

zagfles

Archi_Bald wrote: »

How do you suggest the country raises the taxes that are needed to pay for the social infrastructure of the country in your "tax only once" world?

There would only be 2 alternatives - cut the services back to the available money, or 2) raise income tax.

Neither alternative would be terribly popular, don't you think?

You've hit the nail on the head. Raising tax rates isn't popular, so there are all sorts of fiddles, anomalies and silly complications as discussed in this thread, to pretend tax is low by disguising the tax we pay. Like double income tax on interest, like the child ben tax, like the personal allowance withdrawal etc.

Personally I'd prefer a simpler, honest income tax system with simple progressive rates or even flat rate with a citizen's income, instead of the mess we have now which is all about spin and making tax rates appear to be low when they aren't.

bowlhead99

zagfles wrote: »

All examples of stupid unnecessary complications in the tax system. If they want to take more money off people on higher incomes, then do it in an honest and fair way and raise tax rates. Instead of having silly marginal humps like the child ben tax or the personal allowance clawback.

IMHO it is already an honest and fair way. I know that if I earn 102k they do not want me to have the annual allowance and they will start to take it back. If I had child benefit at 50k but was getting a pay bump to 70k they would start to take it back. Those of us who have to give these things back understand why, even though they don't really want to.

Yes, the "anomolies" are painful because we are giving up something we have been used to, and giving it back. If on my theoretical 101k salary, my boss wants to thank me by giving me an extra thousand pounds out of the till for a job well done, he pays 13.8% employer NI, and can afford to pay a bonus of 879 to me and the ers NI on top. I get the joy of paying 60% marginal tax to the tax man (527) and 2% NI (18). My take home is 334 and it cost the company 1000. Of course it didn't really cost the company 1000 because if they had not paid me and taken more profit for themselves they would have paid more tax themselves, so there is something of a tax shelter. But basically for me I am not getting much motivation to earn that bonus because I am giving back a benefit I previously enjoyed.

However if you are saying that if the alternative to me paying a clawback on the benefit I no longer need, to "spare me the pain" of a high marginal rate at 100k, would have been to just "be honest with people and charge me a higher rate" of say 45 or 50% from a lower bracket, sorry I do not buy that.

If I was looking at paying 50% tax on all new income on a middle manager London salary of say £50-60k I may already be demotivated with how much the government is taking off me and not bother to strive for the 60, 70, 80, 100k salary losing half of every pound as I go.

Instead under current rules I can stay on my 40% bracket for a long time, have a bit of short term pain at 100k through 110k, and then start to see the light at the end of the tunnel from that point because by 120k I will be out the other side and back to 40%. If I don't like paying 60% on the income between 100 and 120 I can put it in a pension gross just like when I didn't like paying 40% on a lower salary and put some of that in gross.

If you ask someone on the child benefit threshold you will probably get the same answer. Do I want to give up child benefit once my household income is over 30k, by simply having a higher tax rate for lower earners? Or can I continue on the lower rate for longer with the tax credit on the side and then give it up once my family is meaningfully wealthier, like I do at the moment. People would prefer the current status quo.

But of course raising tax rates gets bad headlines.

Yes because people do not like general increases to everybody's tax.

What they will tolerate is a tax break being given to a family with young kids as long as they don't earn nice multiple of the average salary, at which point they should start to pay it back out of new income.

What they will tolerate is a guy having an annual allowance that he holds on to until he is top 1-5% income bracket and then gives back out of new income.

What they will tolerate is someone who has minimal earned income and a bit of interest from the assets accumulated over their lifetime, not paying tax on that interest, as long as it's given back when someone reaches a higher income. They can have the tax break at 12k but not at 22k.

It's basically a wealth tax at the moment - the real value of most people savings aren't rising yet they pay tax on it if it's not in an ISA...

True. I don't generally like wealth taxes too much for the "tax on tax" reason that you suggest, however ultimately if I use my accumulated wealth to lend to a bank or a business and that bank or business makes profits and gives me a slice back, I have made some sort of profit. Regrettably a tie to inflation is impractical to monitor and could not reflect people's personal inflation rate.

The overall concept of a wealth tax is not insane. An example is my council tax. I don't particularly like paying band G although I accept you have to split up the costs of running the country somehow. If we made everything all about earned income and ignored existing wealth and savings/investment income, then I would pay massively more than my 60 year old non-working neighbour which I would not be happy about. He has a very valuable house and huge accumulated wealth. Hard earned no doubt, over time. Some of it of course from buying the house at 2x his salary years ago, an opportunity I will never have but to moan would be jealousy...

But a road needs fixing. A council admin clerk needs employing. Should I pay for it all because I have the income coming in and a pound in the bank? Or should he chip in too from his accumulated millions? I am not particularly bothered whether he invests his huge wealth efficiently to beat inflation or not. He and his family will use the road. They will use the council services. I don't really have much spare cash. Should I build the road and give a year's employment to the council worker out of what would be my future wealth? Or should we both pitch in and he use some of his existing wealth?

Bottom line, everyone should pay tax as best they can to ease the burden on others. If you have earned income it reflects on your personal luck and your personal endeavour. If you have unearned income it reflects on your personal luck and previous endeavours combined with someone else's endeavours to do something productive with the assets you have.

If society needs some government expenditure or government investment, I believe we should all contribute out of the income we earn from our current endeavours and income someone else earns for us out of the net proceeds of our previous endeavours. And we pay tax if, within reason, we have either of these things from when we're born to when we die.

Sure, you can't tax income from wealth too much that it disincentivises people from creating it. But you can't tax income from earnings so much that it disincentives people from creating it either. So we can't solve the problem by simply saying 0% on unearned income [what, even fatcats!!] and hike it up on earned income [what, even single mums!!].

The tax system is a compromise to avoid annoying extremes which is why it is not "simple" and there are inevitably pinch points and loopholes. If we want to target benefits and outcomes for types of people we want to help and behaviours we want to encourage: tax does have to be taxing.

noh

gadgetmind wrote: »

The interest won't be taxed at source as we'll send in the relevant forms, but yes, the dividends will come with the 10% tax credit.

My understanding is that Mrs G's pension income will use personal allowance, her interest her 0% savings tax band (but not sure if bond/PID income counts as savings?) and her dividends slot into basic rate so no more tax.

I don't think you can use a R85 to have savings interest paid gross in the circumstances you describe.

The first question on the form is

"Is your income likely to be below your annual taxfree
allowance?"

You will have to answer no as the allowance will be £10500 and the income is higher.

The tax paid on savings at source will have to be reclaimed via self assessment or using a R40.

zagfles

bowlhead99 wrote: »

IMHO it is already an honest and fair way. I know that if I earn 102k they do not want me to have the annual allowance and they will start to take it back. If I had child benefit at 50k but was getting a pay bump to 70k they would start to take it back. Those of us who have to give these things back understand why, even though they don't really want to.

So if it's honest, instead of the personal allowance clawback, why don't they just say there's a 60% tax band between £100k and £120k?

Because that is exactly what there is, the personal allowance clawback is identical to having that 60% band between £100k and £100k plus twice the PA. Everyone would pay exactly the same tax as they do now if they just inserted a 60% tax band between £100-120k and let everyone keep the £10k personal allowance. So why not just admit it?

Because tax rates at 60% don't look good, it makes a farce of so called "progressive" taxation when tax rates rise to 60% then fall to 40% then go up to 45%. It makes the tax system look stupid. Because it is, when you strip away the bull designed to disguise high tax rates.

Yes, the "anomolies" are painful because we are giving up something we have been used to, and giving it back. If on my theoretical 101k salary, my boss wants to thank me by giving me an extra thousand pounds out of the till for a job well done, he pays 13.8% employer NI, and can afford to pay a bonus of 879 to me and the ers NI on top. I get the joy of paying 60% marginal tax to the tax man (527) and 2% NI (18). My take home is 334 and it cost the company 1000. Of course it didn't really cost the company 1000 because if they had not paid me and taken more profit for themselves they would have paid more tax themselves, so there is something of a tax shelter. But basically for me I am not getting much motivation to earn that bonus because I am giving back a benefit I previously enjoyed.

However if you are saying that if the alternative to me paying a clawback on the benefit I no longer need, to "spare me the pain" of a high marginal rate at 100k, would have been to just "be honest with people and charge me a higher rate" of say 45 or 50% from a lower bracket, sorry I do not buy that.

So why is you think tax rates should go from 20%, to 40% up to 60% then down to 40%, then up to 45%? Is there some reason people on £120-150k should have a lower marginal rate than someone earning £100-120k? Is there some logic behind it?

If I was looking at paying 50% tax on all new income on a middle manager London salary of say £50-60k I may already be demotivated with how much the government is taking off me and not bother to strive for the 60, 70, 80, 100k salary losing half of every pound as I go.

Instead under current rules I can stay on my 40% bracket for a long time, have a bit of short term pain at 100k through 110k, and then start to see the light at the end of the tunnel from that point because by 120k I will be out the other side and back to 40%. If I don't like paying 60% on the income between 100 and 120 I can put it in a pension gross just like when I didn't like paying 40% on a lower salary and put some of that in gross.

Well exactly. As people do to avoid child ben clawback. As people do to get extra tax credits. The people who understand the system can play it and avoid high marginal rates.

If you ask someone on the child benefit threshold you will probably get the same answer. Do I want to give up child benefit once my household income is over 30k, by simply having a higher tax rate for lower earners? Or can I continue on the lower rate for longer with the tax credit on the side and then give it up once my family is meaningfully wealthier, like I do at the moment. People would prefer the current status quo.

Yes because people do not like general increases to everybody's tax.

What they will tolerate is a tax break being given to a family with young kids as long as they don't earn nice multiple of the average salary, at which point they should start to pay it back out of new income.

So have a family and have higher marginal tax rates? Add in benefits/tax credits withdrawal rates and it's almost not worth working for a lot of people with kids.

In most other countries your marginal tax rate will go down if you have a family, because tax is assessed on the family not the individual. Which is one of the reasons the UK has a greater proportion of children living in workless households than any other EU country, despite having lower unemployment than the EU average.

What they will tolerate is a guy having an annual allowance that he holds on to until he is top 1-5% income bracket and then gives back out of new income.

What they will tolerate is someone who has minimal earned income and a bit of interest from the assets accumulated over their lifetime, not paying tax on that interest, as long as it's given back when someone reaches a higher income. They can have the tax break at 12k but not at 22k.

Leading to higher marginal tax rates on lower incomes...

True. I don't generally like wealth taxes too much for the "tax on tax" reason that you suggest, however ultimately if I use my accumulated wealth to lend to a bank or a business and that bank or business makes profits and gives me a slice back, I have made some sort of profit. Regrettably a tie to inflation is impractical to monitor and could not reflect people's personal inflation rate.

The overall concept of a wealth tax is not insane.

Again - it may not be. But admit it! Be honest about it, like with the 60% band on £100-120K. Call it what it is!

An example is my council tax. I don't particularly like paying band G although I accept you have to split up the costs of running the country somehow. If we made everything all about earned income and ignored existing wealth and savings/investment income, then I would pay massively more than my 60 year old non-working neighbour which I would not be happy about. He has a very valuable house and huge accumulated wealth. Hard earned no doubt, over time. Some of it of course from buying the house at 2x his salary years ago, an opportunity I will never have but to moan would be jealousy...

But a road needs fixing. A council admin clerk needs employing. Should I pay for it all because I have the income coming in and a pound in the bank? Or should he chip in too from his accumulated millions? I am not particularly bothered whether he invests his huge wealth efficiently to beat inflation or not. He and his family will use the road. They will use the council services. I don't really have much spare cash. Should I build the road and give a year's employment to the council worker out of what would be my future wealth? Or should we both pitch in and he use some of his existing wealth?

Bottom line, everyone should pay tax as best they can to ease the burden on others. If you have earned income it reflects on your personal luck and your personal endeavour. If you have unearned income it reflects on your personal luck and previous endeavours combined with someone else's endeavours to do something productive with the assets you have.

If society needs some government expenditure or government investment, I believe we should all contribute out of the income we earn from our current endeavours and income someone else earns for us out of the net proceeds of our previous endeavours. And we pay tax if, within reason, we have either of these things from when we're born to when we die.

Sure, you can't tax income from wealth too much that it disincentivises people from creating it. But you can't tax income from earnings so much that it disincentives people from creating it either. So we can't solve the problem by simply saying 0% on unearned income [what, even fatcats!!] and hike it up on earned income [what, even single mums!!].

The tax system is a compromise to avoid annoying extremes which is why it is not "simple" and there are inevitably pinch points and loopholes. If we want to target benefits and outcomes for types of people we want to help and behaviours we want to encourage: tax does have to be taxing.

No, the tax system is designed to pretend it's what it isn't. It claims to be progressive, but is actually regressive. It claims to be simple but it's complicated. It claims to be fair, but it isn't. It's full of quirks and anomalies which those in the know can take advantage of, while those who don't get shafted.

The reason for its design isn't some inherant logic in why people in some circumstances should have higher marginal rates than people in other circumstances. It isn't that people on £130k need incentivising more than people on £110k. It isn't that people with a family need less incentive to work.

What is the top income tax rate? Look at the HMRC site, you'll see it's 45%. Look under the covers, you'll see it's 60%. Look deeper, adding in NI, employer NI, tax credits withdrawal rates, child ben clawback, and you get much higher marginal rates, over 100% in some cases.

It's designed to present an image rather than reality. It's designed to look good rather than function well. It's like a used car with immaculate paintwork but with a dodgy engine.

epicurate

I completely agree with Zagfles reasoning on the marginal tax rate. I think it's slightly different when you have two systems interacting in weird and wonderful ways (i.e. tax and benefits). But when you have what is supposed to be a unitary system (i.e. just plain old income tax on the most common kinds of income) with such weird quirks it's hard to conclude that the logic behind it is anything other than obfuscation on the part of politicians. I try to look on the bright side and think of it as an extra incentive to pile into my pension when I reach those dizzy heights.

On the other hand I completely disagree with Zagfles on his double income tax on interest point. To take a similar example to his, businesses can only really reinvest their after-tax profits in the business, so therefore their future profits are all double taxed? Poly-taxed? I genuinely don't understand the alternative you're offering. Given how generous ISA limits are (even before this budget) I think that's a fair way to proceed with taxing interest, and means that in practice people don't tend to pay much tax on interest if they're moderate earners who save in ISAs regularly. Post-Budget, I think the limits are too generous (although I personally stand to gain). The Chancellor pointed out in his speech that a lot of people who hit the cash ISA limit are basic rate taxpayers. That's a fair point, but I would bet the evidence for demand for a £15k limit amongst that demographic is poor. Leaping to a £15k limit is going to have a limited effect on those basic rate taxpayers whose interests he's implying he's got at heart. However it makes a big difference to the wealthiest in society, those who will probably have the confidence or support/advice to potentially invest in higher long term return S&S ISAs, and make more ISA millionaires. Any claim of helping the "squeezed middle" doesn't ring true to me. If the definition of squeezed middle is someone who can put away £15k a year in ISAs, then I think most people would say "sign me up"!