How to increase the 20% tax band dramatically

Pennywise

Some misunderstandings here. NIC is "per job", so if it were extended, it could still be "per source". So, today, someone with 2 jobs, each paying £8k p.a. pays no NIC. Likewise, if NIC was extended to pensions, someone with 2 pensions, a state pension of £8k and an occupational pension of £8k would pay no NIC. If you "earn" more than the £8k limit, you only pay NIC on the excess. So, if you simply charged NIC on state and other pensions, under the identical rules (PAYE etc) as for employment, only those people with relatively high incomes would pay NIC. So it would actually work quite well - lower earners and those with several small pension sources would pay nothing or little, but those pensioners with very generous pensions would pay quite a bit. So it would target the wealthier pensioners and barely affect the lower income pensioners at all, so no need for corresponding increases in pensioner benefits as there'd be no shortfall for lower income pensioners. A win-win.

getmore4less

caronoel wrote: »

The tax base for National Insurance is just too narrow.

The 20% tax band could be increased hugely, thereby giving a massive boost to the "squeezed middle", through these measures:

1) Apply National Insurance to income post State Pension Age. This is particularly important from an intergenerational viewpoint. As the population ages, so the cost of pensions and health care will be increasingly borne by the working age populace, unless we share the pain with those who benefit from it

2) Apply Employee National Insurance to dividends, rental income and interest to rebalance the tax disadvantages from those with mainly PAYE income. In particular dividends for "contractors" are often a very clever tax wheeze

3) Raise CGT rates to an individual taxpayer's marginal PAYE rate. No reason why capital gains should be taxed more lightly than income.

4) Limit the level of tax relief on charitable donations to the first £1,000, and/or limit the ability of those paying tax at 40% or 45% to claim back additional taxes.

The serious flaw with the NI case is that the window for the 12% is the same as for the current 20% band as it drops to 2% after that

What happens is you make the effective tax rates 32% and 42%

The middle income bands that supplement their income with other non NI sources get hit 12% while the higher income will have used up their 12% get hit 2%


The people hit hardest are those with income under £46k trying to save.

the per job/source issue has been covered by PW

Pennywise

caronoel wrote: »

2) Apply Employee National Insurance to dividends, rental income and interest to rebalance the tax disadvantages from those with mainly PAYE income. In particular dividends for "contractors" are often a very clever tax wheeze

Which has already been closed due to the new 7.5%/32.5% dividend personal tax on dividends. Corporation tax at 19% has already been paid on the profits which are distributed as dividends, so the effective tax for a basic rate taxpayer is 32%, i.e. equivalent to 20% b/r tax and 12% national insurance! So, whilst the dividend "wheeze" used to be good, it was actually stopped last year by the current government. (Shame Gordon Brown allowed it and encouraged it during Labour's 3 terms of office!).

Thrugelmir

Pennywise wrote: »

Which has already been closed due to the new 7.5%/32.5% dividend personal tax on dividends. Corporation tax at 19% has already been paid on the profits which are distributed as dividends, so the effective tax for a basic rate taxpayer is 32%, i.e. equivalent to 20% b/r tax and 12% national insurance! So, whilst the dividend "wheeze" used to be good, it was actually stopped last year by the current government. (Shame Gordon Brown allowed it and encouraged it during Labour's 3 terms of office!).

Any indication as the amount of tax receipts this has raised or projected to raise?

GreatApe

Employers NI is also an income tax on the individual
If an employer has £100 for wages this is reduced to £86.20 after employers NI

If the employee is also in the 20% band their marginal income tax is 20% and their marginal NI is 12%
So out of the original £100 there remains a post tax £58.616
An effective tax rate of 41.384%

For higher rate tax payers its 13.8% employer 2% employee plus 40-45% income taxes
Therefore 50.004% to 54.314%

Basic rate tax payer 41.384%
Higher rate payer 50.004%
Additionally rate layer 54.314%

Quite ridiculous taxes IMO
But it looks much more honest and much closer to the fact that the government is about 45% of the economy.

GreatApe

Pennywise wrote: »

Some misunderstandings here. NIC is "per job", so if it were extended, it could still be "per source". So, today, someone with 2 jobs, each paying £8k p.a. pays no NIC. Likewise, if NIC was extended to pensions, someone with 2 pensions, a state pension of £8k and an occupational pension of £8k would pay no NIC. If you "earn" more than the £8k limit, you only pay NIC on the excess. So, if you simply charged NIC on state and other pensions, under the identical rules (PAYE etc) as for employment, only those people with relatively high incomes would pay NIC. So it would actually work quite well - lower earners and those with several small pension sources would pay nothing or little, but those pensioners with very generous pensions would pay quite a bit. So it would target the wealthier pensioners and barely affect the lower income pensioners at all, so no need for corresponding increases in pensioner benefits as there'd be no shortfall for lower income pensioners. A win-win.

The effective tax rates are

0%
41.4%
50%
53.4%

If you kept NI at 12% rather than falling to 2% the highest tax bracket would be 62.934% which would be ridiculous. On top of that they have council tax VAT duties to pay push up their tax rate further

The only one that sticks out a lot is the 0% band
As a minimum employers NI should apply from the first pound of earnings so the lowest bracket would be 13.8%

Thrugelmir

GreatApe wrote: »

Employers NI is also an income tax on the individual

No it's not.

For example.

As an employer, you can usually reclaim 92% of employees' Statutory Maternity ( SMP ), Paternity, Adoption and Shared Parental Pay. You can reclaim 103% if your business qualifies for Small Employers' Relief.

LHW99

Under current arrangements earnings from employment are taxed far more heavily than those from the ownership of assets. I see no reason why someone earning £30K from employment should pay 12% NI and someone earning the same amount from dividends should not.

Except that in many (not all) cases the dividends are from share or other investments which have been bought from earned income which has already been subject to tax and NI.
How do you avoid double taxation?

Surely the best way to increase the take of the 20% tax band is to get more higher skilled people, who can take up higher skilled jobs, get paid more and pay (more) tax. Isn't there also the problem that there aren't enough rich people around to pay the top rate of income tax? Making more rich people would mean more people paying that top rate.