Technorama

The UK taxation system does really need a touch of modernisation.

Gordon Brown spoke about a tax on financial transactions this week. I don't agree with that, I've got a better idea. Simplification and adoption of slightly higher rationalised income tax rates like the modern economies of Scandinavia

Get rid of tax havens using the pound like Jersey, Guernsey, Isle of Man. If they want to be Bailiwicks which are also Crown dependency they should fall under the gaze of HMRC like the rest of the UK.

Tax is far more complicated in the UK than it needs to be. It has only got worse since Labour got into power in '97. I propose some significant simplifications below.

To give an example on the tax paid by someone on 100k (I wish!):

Gross pay £100,000 (arbitrary figure)
Less 12.8% employers NI on most of it
Less 11% employees NI on ~£35k of it
Less 1% employees NI on ~£60k of it
Less 20% tax on ~£35k of it
Less 40% tax on ~£60k of it

Take home pay: £51,750

You can see the 40% bracket is actually only really 30%, because, employee NI drops from 11% to 1%. So for the employee there is only 10% tax more tax, however, the employer still needs to pay 12.8% on the whole amount!

In the UK, your the pay you see on your payslip doesn't give a full picture as there are taxes on top of your Gross Pay that do not see (they even grey them out for some obscure reason on the copy of the P60 you receive at the end of each year).

In other countries they have switched to "flat tax", e.g. Romania now is 16%. I don't agree with this, as it taxes the lower and middle income brackets the same as the higher-earners who can afford to pay much higher rates of tax.

UK tax deductions are:

1. Employers NI : 12.8% on salary after the first ~400 per month or so. (You never see the amount of this on your payslip.)
2. Employees NI (quite complicated) 11%
3. Income tax: Stepped rate, now 20% or 40% (10% rate bizarrely dropped by Labour 2yrs ago, but not for savings confusingly)
4. Tax free income up to 6,475 (this is your tax code, with the last digit replaced by L)
5. "Emergency Tax codes", this penalises those who arrive without a P45, or those who start working in the UK without an NI card while waiting for it to arrive.
6. Your pension contributions to your pension pot are tax free on input, however, any lump some when you retire, or the monthly income is taxable as your pay is now.
7. For those people into the 40% tax bracket they have a statutory duty to fill in a tax return to declare the difference between their savings interest rate deducted (@ 20% of the interest, and the 40% bracket).
8. HMRC waste time and money each year by sending out "Employers" software CD-ROM and guide on 31 March, and then on 6 April after new budget they send it all out again, with revisions. Then when Labour made the 10% tax mistake which took around £100 per year off the poor, they issued it all again in September.
9. I never use their HMRC software as payroll agency does it for me, so the CDs all go in the bin.
10. HMRC force companies to run multiple PAYE schemes for different offices, branches and purposes. For every PAYE account they have, HMRC sends all the same communications.
11. HMRC lets companies use payroll agencies, they don't make any payments, they just generate payslips and submit end of year P60 information. So they also get copies of every Employers CD-ROM and information pack.
12. Gift aid must be declared on personal tax return. It is not like we get any credit from declaring it anyway. No one checks on the information submitted, and it doesn't get calculated into anything useful on personal tax return.
13. Stamp duty, 1% up to £250k house value (calculated on total!), and then 3% if you slip over the 250k mark (like many houses now do), kerching, £8k stamp duty payable by the purchaser..
14. Tax credits. Labour make you pay tax, then claim it back so you are grateful.
15. 50% tax rate for the amount of income above 100k.
16. Company dividends tax free to the individual (10% nominal rate considered already paid), because the company has already paid Corporation Tax (~21%), upper rate of 32.5%.

The simplifications:

1. "Emergency Tax codes" abolished, if someone is a new employee, even with an NI number, they go on the same rate as everyone else. Employer should keep a photocopy of their ID and proof of address.
2. The Tax free allowance bumped up to to track the minimum wage @ 40 hours per week, 52 weeks per year £11,897.60 (5.72 * 40 * 52)
3. Tax codes abolished, any tax due from a previous year cannot be collected by modifying the following year's tax code.
4. Employer's NI moved on to the Employee's side of the equation (with corresponding increase to cover it).
5. Keep stepped income tax bands, combined NI+income tax gives: 45%, 65%, 75%
6. HMRC only send the "Employee Bulletin" to those who have registered for it, likewise their CD-ROMs
7. Notify your bank you are in the 40% tax rate and they will do all the interest deductions automatically, saving you the need to file a personal tax return.
8. Gift aid no longer must be declared on personal tax return.
9. Stamp duty stepped, not calculated on whole amount. So 1% of amount up to 250k, and 3% on the amount above 250k. Also 5% on the amount above £1m.
10. Tax credits are gone, your income is untaxed up to £11,897.60 as a replacement.
11. Corporation tax rates increased slightly to 23% for small biz, and dividends taxed at income tax rates, less the Corporation tax rate of 23%.

The final result:

• Tax free income of £12k per year.
• No forms to fill in (tax credits, or personal tax returns)
• Dividends not used to avoid income tax rates.

;-)

Labels: Tax, UK