Tax thresholds pondering

Grumpy_chap

Dazed_and_C0nfused said:

Grumpy_chap said:

In recent times, the personal allowance, higher rate and additional rate thresholds (plus tapering of the personal allowance) have all remained static, or virtually static.  This has the effect of increasing tax take, yet no-one actually pays "more".

With inflation rising and NMW increasing plus the pension triple lock, we'll reach a point that everyone has above personal allowance and being higher rate is far from exceptional.  We actually had a briefing at work yesterday where they outlined the business is forecasting and planning on the basis of inflation over the 5 year period (of which this is year 1) at 30 - 35% over the span.

There are two ways that the future tax thresholds can be managed:

1. As currently - at the whim of the Government of the day.

2. Linked to some factor or combination of factors, rather like the triple lock for state pension, that the Government cannot directly control, so something like:

• NMW set by wage commission.
• Personal allowance = 65% of NMW FTEE (full-time equivalent earnings)
• Higher rate = 4 x personal allowance
• Additional rate = 3 x higher rate

The trouble with this type of thing is that the proportions are and can only ever be nominal but once established are soon created as sacrosanct.  It's also highly unlikely to ever happen as no Government likes to give away control in such a fashion.

And even if one Chancellor thought it was a good idea the next one would likely see things differently and completely change it!

Not necessarily.  If there is a formulaic approach that survives long enough it can become baked in and sacrosanct with all parties pledging to protect come at each successive general election.  Rather like happened with the pension triple lock.  The trouble with this type of thing is that the sacrosanct then gets protected even when it is long overdue for further change.  

MattMattMattUK

If we are going to make substantial changes then we are probably better off with a complete revision of the tax system. The UK tax system is the most complicated in the world with over six thousand pages of legislation and nine thousand pages of guidance. 

Even related to income it would make more sense to abolish National Insurance and raise Income Tax proportionately, when it comes to it I would also probably opt for a substantial reduction in, or abolition of the Personal Allowance, which is the highest in the EU, with most countries having a limit of a few thousand Euros. 

I would probably go for £1,000 personal allowance (baseline, to exclude children doing paper runs etc.)
Starting rate of 30% from £1,000-49,999.99, with abolition of NI this would be neutral.
Higher rate of 40% from £50,000-149,999.99. 
Additional rate of 47.5% from £150k
No removal of the (lower) personal allowance from higher earners. 
I would allow legally married couples to jointly file their tax if they wished, pooling the allowance and threshold (eg 40% rate would not kick in until a joint income of £100k was reached).

Grumpy_chap said:

Dazed_and_C0nfused said:

Grumpy_chap said:

In recent times, the personal allowance, higher rate and additional rate thresholds (plus tapering of the personal allowance) have all remained static, or virtually static.  This has the effect of increasing tax take, yet no-one actually pays "more".

With inflation rising and NMW increasing plus the pension triple lock, we'll reach a point that everyone has above personal allowance and being higher rate is far from exceptional.  We actually had a briefing at work yesterday where they outlined the business is forecasting and planning on the basis of inflation over the 5 year period (of which this is year 1) at 30 - 35% over the span.

There are two ways that the future tax thresholds can be managed:

1. As currently - at the whim of the Government of the day.

2. Linked to some factor or combination of factors, rather like the triple lock for state pension, that the Government cannot directly control, so something like:

• NMW set by wage commission.
• Personal allowance = 65% of NMW FTEE (full-time equivalent earnings)
• Higher rate = 4 x personal allowance
• Additional rate = 3 x higher rate

The trouble with this type of thing is that the proportions are and can only ever be nominal but once established are soon created as sacrosanct.  It's also highly unlikely to ever happen as no Government likes to give away control in such a fashion.

And even if one Chancellor thought it was a good idea the next one would likely see things differently and completely change it!

Not necessarily.  If there is a formulaic approach that survives long enough it can become baked in and sacrosanct with all parties pledging to protect come at each successive general election.  Rather like happened with the pension triple lock.  The trouble with this type of thing is that the sacrosanct then gets protected even when it is long overdue for further change.  

I totally agree with that, the triple lock, Barnett formula, the way the NHS is operated, our benefits system etc. all have been placed on some kind of altar and the reality is that they are not fit for purpose and we need to start again, not just tinker around the edges. 

[Deleted User]

I agree that something radical should occur. However, on that example, someone earning £12000 per annum would have £3300 in deductions whereas, from August, there would be zero! Someone on £20000 per annum would lose £5700 but only £2470 from July under the current system. 

Not sure of the rates now but I do remember coming across the Australian system around 20 years ago where 15% was deducted from all income with a reckoning up later on submission of a compulsory tax return. No idea if still in operation.

DoctorStrange

I'm not sure I'm in favour of increasing the % in line with the £. A flat rate still seems fair as someone earning double than someone else will still pay double the tax.

I think I'd set the TFA at the Living Wage so that everyone can take care of their themselves first and foremost, then 33.3% over and above that on all income (so earnings, dividends, rent etc. are all taxed the same). Two thirds to thyself, one third to the State seems a reasonable starting point.

I'd probably also look to introduce some form of unrealised capital gains tax for those with a net worth greater than, say, £2.5m. That's obviously much harder to sort but I do think treating the "rich" differently when it comes to capital is needed.

Jeremy535897

DoctorStrange said:

I'm not sure I'm in favour of increasing the % in line with the £. A flat rate still seems fair as someone earning double than someone else will still pay double the tax.

I think I'd set the TFA at the Living Wage so that everyone can take care of their themselves first and foremost, then 33.3% over and above that on all income (so earnings, dividends, rent etc. are all taxed the same). Two thirds to thyself, one third to the State seems a reasonable starting point.

I'd probably also look to introduce some form of unrealised capital gains tax for those with a net worth greater than, say, £2.5m. That's obviously much harder to sort but I do think treating the "rich" differently when it comes to capital is needed.

Your last suggestion suffers from the same issues as a wealth tax: high cost of collection, small total revenue, easily avoided, and problems with the main residence and pensions, to name just a few. If you came up with a wealth tax that was capable of collecting a noticeable amount of tax, it would fail when the rich decamped elsewhere.

Grumpy_chap

DoctorStrange said:

I'd probably also look to introduce some form of unrealised capital gains tax for those with a net worth greater than, say, £2.5m. That's obviously much harder to sort but I do think treating the "rich" differently when it comes to capital is needed.

That's a low threshold for 'rich' and would include many professionals towards later career:
Mortgage free house £1m
Pension fund £1m
Premium bonds 

Privatisation shares

TESSA / ISA savings 
BTL property

How do you propose to actually collect the unrealised gain? 
How do you propose to calculate what that gain is?
Will you give tax back if the asset value subsequently falls?

Albermarle

That's a low threshold for 'rich' and would include many professionals towards later career:

If I remember correctly from the ONS wealth survey, having household assets around £2.5M would put you in the Top 2 or 3 %. I think you need about £4M to get in the Top 1%. Of course the Top 0.01% are in a completely different league.

Jeremy535897

Albermarle said:

That's a low threshold for 'rich' and would include many professionals towards later career:

If I remember correctly from the ONS wealth survey, having household assets around £2.5M would put you in the Top 2 or 3 %. I think you need about £4M to get in the Top 1%. Of course the Top 0.01% are in a completely different league.

Yes, and it is only the moderately wealthy that get caught by this sort of tax, which significantly lowers its yield, as it is more unlikely they will simply relocate, as the very wealthy would.

Grumpy_chap

Albermarle said:

That's a low threshold for 'rich' and would include many professionals towards later career:

If I remember correctly from the ONS wealth survey, having household assets around £2.5M would put you in the Top 2 or 3 %. I think you need about £4M to get in the Top 1%. Of course the Top 0.01% are in a completely different league.

Do the ONS include Principal Private Residence and pension equity in the definition of wealth / assets?

If it does, would such a wealth tax be simply a version of IHT without the decency to wait until death?

Andy_L

Grumpy_chap said:

Albermarle said:

That's a low threshold for 'rich' and would include many professionals towards later career:

If I remember correctly from the ONS wealth survey, having household assets around £2.5M would put you in the Top 2 or 3 %. I think you need about £4M to get in the Top 1%. Of course the Top 0.01% are in a completely different league.

Do the ONS include Principal Private Residence and pension equity in the definition of wealth / assets?

If it does, would such a wealth tax be simply a version of IHT without the decency to wait until death?

Yes:

"Total net wealth includes four main components:

net property (value of residences minus mortgage debt)

physical (household contents, vehicles)

private pension

net financial (savings or investments minus financial liabilities)"

https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/totalwealthingreatbritain/april2018tomarch2020