So how much is fair? by Rebecca Benneyworth

@Paul Donert
Don't suppose the report breaks the NIC down into ee's and er's ?

Would be handy to see the "burden" borne by the employer vs. that by the employee ...

Then you might also have some ammo to propose, say, those without employment rights and advantages should not pay the -ee's NI but only (an adjusted ?) -er's ...

If I may be permitted to enter the fray again. My comments concerning the minimum wage and M Colbert were intended to be polemical.

It is very difficult (for an amateur in these matters) to discover how the minimum wage is determined but a search on Google produced this academic comment on the original 1998 proposal.

The National Minimum Wage was thus an essential component in making viable the
Government’s ambitious strategy of reforming the tax and benefit system in order to
encourage the jobless back into work and to reduce family poverty. The question of a
decent living standard was being addressed through the whole package around Working Family Tax Credits of which the National Minimum Wage was a part, and not through the National Minimum Wage alone.

So, as many of your correspondents have indicated, that those on the minimum wage should be taxed at 12% is possibly wrong.

The blight is of course fiscal drag and if I were in power the first thing that I would do would be to appoint an independent body to detremine annually by how much allowances and band rates should be increased.

One correspondent has asked in what way is the government revenue raised.

The amount raised in 2007-2008 was £451,053 million.

This, broken down in percentage terms, was:
Income tax 32.7; NIC 22.3; CGT 1.2; Stamp duties 3.1; Total 59.2
Consumption: VAT 17.9; petrol and fuel 5.9; "pleasure" 5.5; Total 29.2
Corporation tax 10.3
Other: "Green" 0.4; IHT 0.8; Total 1.2

So the amount raised through NIC shows that M Colbert was indeed right about his goose's feathers.

If I may be permitted to ask you to broaden the debate. Several columnists in the FT have argued that land should be more heavily taxed; the Economist has previoulsy argued that consumption should bear a greater burden. The debate concentrating exclusivley on income taxes I think skews the argument.

@NIck

ISTR on Daily Politics that HALF the tax bill is paid back out in benefits - basically redistribution. Votes can be bought.

Before deciding how much is fair i would like to know how much is recevied from each source of tax.

Then how what the money is spent on.

A list of statistics on how efficient these services are being run.

I would actually like to see what i get for my money! Redistributing my tax pounds to the lazy on benefits is not a good feeling.

What i would like to happen.

Bring back the nil rate band for Corp tax.

Lower income tax rates, especially at the higher rate. Down to 30% say. It does not sit well for me that if i was a higher rate tax payer i would have to pay over 40% of my salary in tax, THEN National insurance on top.

Inheritance tax cancelled.

This is before i even get started on motoring taxes!!!

@Mark Gleeson:
Why not make tax credits part of the tax system rather than part of the benefits system - i.e. build them into the PAYE/tax codes system.

Then there will never be any 'overpayments' or requirement to notify change of circumstances since your monthly PAYE bill (or worst-case, your SATR) will be correct.

Just another term for progressive taxation, then.

Given the dire state of public finances, tomorrow would be a very good day to fix the tax system. After all, most people are going to be paying more tax for years to come. What harm is a little more pain for a few people going to cause?

Introduce an optional 'household' tax-free allowance of £12,000.
Scrap Tax Credits in a way that doesn't adversely affect the poorest.
Scrap IR35 nonsense.
Apply NICs to all income (but not capital gains) for UK residents.
Apply NICs to all UK income for non-residents.
Standardise corporation tax at 25%
Remove most tax concessions and exemptions.

Hopefully, that all balances!

@MikeW

Before worrying about unintended consequences it's probably best to worry about intended consequences.

Until someone with an IQ and an EQ can work out how to create a Tax system that works it's probably best not to get too clever.

maybe CT or tax on divis should be slightly higher on companies that don't employ anyone apart from directors and shareholders ... or would that have unintended side-effects too ?

Two guys risk all (with their families), i.e. banks won’t look at them until they have 3 years trading under their belt so they have to take 2nd mortgage on their homes to get through the first 3 years, and more, due to wonderful bank managers who have never risked anything in their lives sitting in judgement over them.

Nine years on, as the direct result of their efforts, they now employ 40 people with their company contributing over £300,000 a year to the Government in employee taxes/NIC and company NIC alone, ignoring CT payments.

WHY BOTHER? To take home 5% - 9% more than some jobsworth in a government office sitting around waiting for early retirement and guaranteed pension.

But as Mickey Parish says people like him/them are doing it more for the achievement than just the money.
AND don’t the socialists just love that.
In the example above where the shear hard work and risks taken by the two guys supported by their loyal workers (loyalty due to the company culture created by the guys) enables 30 odd no-mark wasters to sit on their backsides on benefits. Socialism in action.
Oh, 30 odd no-mark wasters or two no-mark MP wasters!

Their efforts are already supporting over 100 people (themselves, their workers and all their families + the 30 odd no-marks). Isn’t that socialist enough for you?

WHY BOTHER? F*** it, shut the company down and go and get a real job; such as ‘street football co-ordinator’ - for the kids who don’t have the nouse to work it out for themselves. Now that would create much more wealth, would it not?

As to the question as to how much tax, why discuss it, very soon it will be double whatever you say to pay for the mess we are in now.

Mike, point taken. Where is the optimum yield point on the Laffer curve? That must set an upper limit to any consideration.

@Rebecca:
Minimum wage for a 35 hour week is just a shade over £10,000, so my figures above give you an idea of what that would be.
Sorry, I was not aware that you could (retrospectively ?) count dividends as well as salary towards a NMW payment - hence my point about the initial case being £10k salary for the director.

I stand corrected ... ;-)

[R: Sorry - I was just overstating the case to make the point clearer !]

@ Edwin: The Laffer curve only works at high marginal rates of taxation. The point is that, at a high rate of taxation, cutting rates significantly increases the incentive for extra work to earn extra money; it doesn't do so at lower rates. If the tax rate is 80%, a 5% cut in the tax rate increases my marginal take-home pay by 25%. At 30% it only increases it by 7%.

You need a significant increase in the amount of effort put in, leading to a significant increase in output and therefore tax receipts on the income from that output, to take more tax from that increased output than you lose on the existing output when the rate is reduced.

A fair set of tax bands would ensure that I pay at least 10% less than I currently do and that those both below and above me pay 10% more than they currently do ... It's the same problem as 'where does the north of England begin?' - it depends on where you come from yourself.

Also, the question can't be answered without specifying what you want the state to provide. Generally we measure our public services against Europe and our tax levels against the USA.

Rather than Transferable allowances it would surely be simpler to just have Household Income, if you had opted for a Joint tax assessment (like US, IOM etc.) ... thus obviating Income Shifting proposals. But you knew that. Also how likely it would be to get implemented ;-)

My view is for a similar stucture to Stephen's apart from the level would be 25% not 30%. The yield may be as good or better at 25% due to the Laffer curve.

Also one other factor apart from employers NICs which is a factor in IR35 avoidance is the lack of transferable tax allowances between spouses. Am I correct in saying Britain is the only European country that doesn't allow this?

Two general points first:

1. A civilised society has to tax in order to spend and to re-distribute, both for the general higher good of society. All tax policy is set by the people's representatives for this reason.

2. There should be a generally similar (but not identical) rate of tax for each broad level of income irrespective of the nature of income or realised gain, in other words it should include employees NIC and/or investment income charge. I suggest the following for Rebecca's suggested bands:

£10,000 10%
£25,000 20%
£45,000 25%
£100,000 35%
Above this 45%

The great advantage of this method is that no matter how people appropriate their income or gain, it all goes to the same pot for taxation purposes. A number of investment tax breaks (for pension contributions, EIS, VCT, etc.) will stay for public policy purposes and each person would be able to work out whether they would like to invest in them rather than paying a higher tax for the pleasure of having the money avaialbe without any strings attached.

What do you think?

Rebecca you must be tearing your hair out; 27 comments and no-one has actually answered the question yet...

So here goes - I'll probably get flamed to hell, but then I never was much like your "average accountant".

£10,000 income - equates approx to national minimum wage for a 35 hour week. So if that is the minimum salary the government says it is acceptable to pay someone, why should they think it is acceptable to take any tax off it? Doh!

Tax (&NI) rate for all Zero %

Income of £25k, £45k, and £100k let's keep it flat i.e. the same rate from £10k all the way up to £100k. The self-employed and owner-managed company directors should get a discount as they take more risk and have less benefits, say a 5% discount?

I'd love to suggest that the flat rate should be 25%, but somehow I fear that would prove inadequate, so I guess I'd have to go to 30% maybe even 33% ...aarggh no that is too much, 30% is as far as I can go. So 30% for employees, 25% for the self employed and small company directors.

Above £100k should we have a higher marginal rate? I think probably yes given that most people could live very comfortably on £100k I don't think they should complain too much about paying 40% or even 45% on earnings over £100k, but 50% is too much. Over £100k I don't think the self employed and Co directors need to continue with a discount, after all they would have paid £4,500 less tax up to £100k which should be enough to buy some income protection insurance.

The madness of the current system with tax credits is that some of the lowest paid end up bearing a marginal rate of something like 70% or more. If you knew that for every extra hour you worked on minimum wage you'd take home only about £1.50 would you be motivated to do some overtime, or try to further your job prospects?
That's not fair, that is very very stupid!

I must also comment on Employer's National Insurance. Isn't it mad to tax businesses who create employment? It's the main reason why IR35 was deemed to be needed; how many owner-managed company directors would bother to take the minimum salary and dividends if it wasn't for E'ers NI? E'ers NI really should go, unfortunately the cost of that would be so high it would have to be made up somewhere else...

@Rebecca
but when asked what would be a fair amount ... nobody will have a stab at a figure

Perhaps it's because there are factors as well as tax in that discussion - e.g. employee rights - or lack of them ... no quid pro quo.

It's not a purely numerical issue.

I tell my employees that if I didn't have to pay employers NICs to HM gov I would give it to them instead. Employers NICs are another tax payed indirectly by employed people.

This may be on the wrong thread but Rebecca's article looks like it was IR35 inspired.

I'd rather use the word "unsatisfactory" in the context of IR35 because I was taught at a very early age that most things in life are unfair and I'd better get used to it (or join the Socialist/Labour party, grow a beard and spend my life moaning).

I spent a good 90 minutes this week explaining IR35 to a very intelligent client who indicated that as a director/shareholder of a service company (as defined by the Employer Helpbook E10) he felt that his arrangement was outside IR35. I'd discussed the criteria of "financial risk" (which I have always, maybe wrongly, thought was paramount) and "control" and we decided that a deemed remuneration calculation was inappropriate.

I was however unable to guarantee that completing his tax return and company accounts showing the correct amount of salary and dividends would leave his company with no further liability in the event of a challenge. There is no other part of my work which comes remotely close to this inherent uncertainty.

We've worked out the least bad option to guard against this ludicrous state of affairs and will leave HMRC to continue their meltdown.

If you read James Lovelock's latest book, The Vanishing Face of Gaia, it might just change your perspective on what is fair, what is right, and what is necessary.

With climate change now well underway, and likely to cause major (and I mean major) changes for humanity within the next few decades, arguing about a few percent of tax really is fiddling while the earth burns. One of the key imperatives is to reduce the human population. The Earth cannot in future sustain more than perhaps 10% of its current population level. Sometime this century, global human population will crash, whatever we do. The best we can, just possibly, achieve is a 'soft landing' in our own neck of the woods.

Hence one imperative is to stop any measures that implicitly support more child-rearing. This includes child allowances and family tax credits. Within the lifetimes of ourselves or our children, availability of sufficient food and water will become the principal political issue worldwide. As we are heavily dependent on imports, the UK will not be insulated from this. We shall need to become self-sufficient in food production. This means that we need people to produce more food.

One suggestion: a grossly simplied tex/benefits system. Cut out all means-tested benefits and have a much higher tax threshold instead (say £10k or £12k, perhaps with some form of 'negative income tax' for the poorest). Tax all UK income, however it is derived (earnings, dividends, whatever), by the same percentage, but with no loopholes for foreign residents etc. If it drives away a few greedy millionaires, so be it. We can do without them. A by-product of this is what many may see as a fairer system.

You then don't need a complex online tax-return system and an army of thousands at HMRC to check and investigate and deal with enquiries. Transfer them all to DEFRA (or better still give them a redundancy/relocation package), and relocate them into the countryside to set up market gardens and grow vegetables.

There seems to me to be far too much time spent considering the balancing of national budgets rather than what people need. With respect to the above article, the question seems very narrow and there is a much bigger picture.

It must surely be the case that it can be decided upon how much people need to live at a basic level. It is certainly the case that it is not at the level of £6k+ per annum, our current annual allowance. Now, I don't exactly know what this annual figure would be but I'm guessing that it must be around £12-£15k per annum as a bare minimum.

So, let's say £15k per annum, for the sake of argument. Why on earth are we taxing people who earn below this level? There are a number of spin-offs to this which I would like to throw in...

- I'm sure that we all know that the tax legislation could be massively simplified. The simpler it is, the less loopholes there are, the easier it is to police, manage and collect.

- if you're not taxing people on the income they need, then you don't need the tax credit system and all that clunky, slow, expensive and largely costly and useless organisation that goes with it.

- people would more willingly pay tax out of income that is not fundamental to their survival and wellbeing. While that income threshold is very subjective from one individual to another, nevertheless a general collective opinion of the correct threshold will form if we think down this route.

- let's please stop differentiating between tax and NI.... it's all tax, it goes in the same pot and NI has long since lost it's identity as providing for pensions and healthcare. To keep talking about tax rates without including NI rates is, frankly, an insult to the intelligence.

From the above, it is possible to easliy determine tax yields for any given tax rate that is set. I, for one, am a proponent of a progressive rate system (people who can afford it can pay it) but I would not advocate a return to the ridiculous rates set by the Labour governments of the 70's.

From there, Government, cut your cloth accordingly. There is profligate waste in public spending which this country could sorely do without (National down to District Council level) and a seeming lack of accountability and justification.

Over to you.

In the British political consensus, 'fair' means a certain degree of wealth redistribution. The only difference between the main parties is the level of reditribution (and that's a very minor difference). 'Fair' also means that those who can afford to pay more should pay more, so long as this does not harm economic growth.

Let's not forget that people on low earnings pay a disproportionate amount of indirect taxes. It also makes a lot of sense not to tax people rather than to tax them and then to give it all back in benefits.

The problem that any government has is that the tax system is in a mess, but fundamentally changing the tax system would be political suicide. (Just think about the 10p tax rate disaster - which was a minor change.) There are many other competing factors that must be resolved when making any tax changes, including:

Millions of pensioners rely on investment income to live.
High taxes stifle economic growth resulting in lower tax receipts.
Even moderately wealthy people can decide live in another country.

One solution may be to charge NICs on all UK taxable income for everyone aged 16-65. Employees would effectively be taxed at a higher rate because of their employers' NICs. In fact, you could just get rid of employees' NICs and increase the basic rate of tax to compensate.

Too simple?

@Mark:

It doesn't follow that if Person A earns more than Person B they can afford to pay proportionately more in tax.

It doesn't follow that moving money from Person A to Person B has a net benefit to the country.

It doesn't follow that Person B spending Person A's money will do so in a way that is of greater benefit to the economy than if Person A spent Person's A money.

In moving money from Person A to Person B via redistributive taxation we incur a transfer cost - namely HRMC employees and computer systems and so on so this is going to be a net drag on the economy.

If Person A gave Person B the money via a personal gift then transfer efficiency would be 100% and the only difference then between Person A or B spending the money would be on the nature of goods being purchased.

This current government has found many ways to inefficiently move money from A to B and we can already see that it doesn't help too much. If Person B loses their job then Several A's are still expecting free money but it no longer exists and so the economic inpact now becomes negative.

Redistribution has the possibility of having some impact when there is money to redistirbute. When that money is not there then it is a major issue.

The problem is a systemic one. Socialism always assumes that there are cows that can be milked to feed the starving and cannot cope when the cows are slaughtered because the starving are used to not having to work food.

WIth the collapse of the banking system in recent years we've seen a slaughter of cows and all of a sudden the free milk has gone and we can see how expensive it all gets.

I think it's economically and philosophically sensible to have a minimum wage and minimum benefit levels but beyond that the case for strong redistribution must surely be very weak given the underlying assumption of an endless supply of money to redistribute.

We've also seen that over this government the demographis that have received lots of free money have increased - perhaps as a consequence of this free money. Therefore we cannot say that redistribution is even neutral. It may be that redistribution may feed on itself in a negative way.

"Fair" is whats reasonable and sensible to you being who you are. A poor man thinks that society should care for those struggling at the bottom to make ends meet and should not tax them. A richman that if he has become rich through his own endeavours he should not be unduly penalised by taxation to keep those at the bottom who make no effort to help themselves.

Taxation is at the heart of most political debates for that reason.

Whilst in Poland in the 1990's I was astomished to learn that taxation was completely linear - there was no personal allowance nor higher tax rates. I asked why that was ans received a blank look and "what ever else would you expect?" The answer it seems was that as it was just emerging from Comunist rule the wages were still mostly fixed and those at the top paid by a multiple of those at the bottom. There was hardly any rich people and little middle class - hence there was no-one to tax at a higher rate anyhow.

Probably everthing has changed by now!

Julian Hamilton - Director Jobtel

There is no such thing as a fair amount of tax. The issue is purely a pragmatic one - what rate do you set to encourage people to create businesses and jobs in the UK, and what rate do you set to prevent people sitting around on benefits when they could be working. At present we have neither.

If you want a "fair" tax system then the starting point would have to be the elimination of the most regressive, rich-aiding benefit of them all, yes, Main Residence Relief. I don't see many posters on here suggesting that.

Much of that written in comments so far shows exactly why accountants should not be let anywhere near tax policy. We see the usual naive perception of the state as predatory, whilst the "wealth creators" (I prefer the term "wealth-diverters") are assumed to need (and/or deserve) tax exemptions on top of the market returns they can make for themselves.

Well, I've got news for you lot - these wealth-diverters are the real beneficiaries of the way our economy is administered by the state. An educated and healthy workforce, extensive markets, a huge purchasing power amongst the general population, good transport infrastructure, a stable society, a strong global presence, a strong legal system, a stable monetary system, banks that can never go bust - these are all maintained by the state ie paid for by taxes, and without them, businesses are less able to succeed. Just go to countries where these things are absent and see how hard it is to set up a successful business, and you'll take a different view of the British state.

The wealthiest beneficiaries of our economy should pay the most for maintaining and administering it.

The crux of all this is that the question of what are fair rates of income tax is almost impossible to analyse because the system is so complex. Tax credits will make an enormous amount of difference to the family on low incomes and cannot be disregarded. A lot of people are paying tax out with one hand and getting "negative tax" back in the other. If we are working out the tax burdens for different levels of income the tax credits must be brought in.

VAT is under the radar in this sort of exercise as well.

All I can say is Aaaaaaaaaaaaaargh!

As everyone knows:

«L'art de l'imposition consiste à plumer l'oie pour obtenir le plus possible de plumes avec le moins possible de cris.»

And for an interesting exercise over the weekend calculate the amount of tax and NI that someone on the minimum wage working a reasonable time during a week will pay.

Firstly, there is no such thing as 'avoidance'.
There is obeying the law or disobeying the law [=evasion].
The current emotion about avoidance is a device of HMRC to excuse their re-interpretation and unaccountable introduction of [often retrospective] 'rules'.

Secondly, 'fair' is personally subjective. If I go abroad once a year on holiday the airfare tax is acceptable. If I am a net importer of wealth and need to travel very much to do that then it is not - I paid >£2k in airfare taxes last year - this year I'll do short hops to Amsterdam and longhaul from there. That I could be taxed on that tax under IR35 seems to me to be legalised theft, not tax.

Thirdly, since I get nothing but aggravation and harassment from government agencies [i.e. they communicate with me], whilst I seem to be personally paying of the national debt, and am not entitled to the benefits of people paying a lot less tax than I have, my views on 'fair' are somewhat jaundiced to say the least.

The tithe was good enough for centuries. Income tax was supposed to be levied on the balance after a family had paid for a reasonable middle-class way of life - the original rationale merits revisiting if only to see how the view of what it is reasonable to screw out of the taxpayer is distorted by socialism.

In the end, fairness is at best illusory in the face of the greed, avarice and fiscal depravity of politicians trying to be re-elected and what they think they have to do to attain that.

There are also further issues regarding "families" and "parents"and how they should be treated.

The current tax system allows tax credits for parents based on joint incomes. If unmarried, I suspect a lot of couples declare their "joint" income bsed on (say) the mother's income only. They could say that their partner is "temporary". Married couples would feel less able to justify that and would tehrfore get less tax credits and so this would seem to work against married couples. Furthermore, unmarried couples have benefitted massively in the past from being able to have 2 principal places of residence again discriminating aginst married couples.

Successive governements often emphasise the family unit being a "good thing" and their support for marriage. For reasons metioned above, this does not seem to be supported by the tax legisaltion.

Consider also a couple with £100k income. If 1 spouse earns this and the other looks after children then their tax/NI burden would be much higher than each spouse earning £50k each. Is that fair?

I declare self interest inthat I am a married parent with a non working spouse!!. Having said that, I agree with an early contributor that I do not see why single people should subsidise those that have children. In my case, though, we do not qualify for tax credits.

As an owner of an SME, I always get cross at the press referring to a "top tax rate" of 40%. As all others in my position know, the top rate including NICs is nearer 55%. Add to that that whatever way you take the money out, if you save or invest to try to remain financially comfortable post-retirement, you then suffer having 40% of the remainder taken away when you die, so the marginal rate of tax on your top slice of earnings above living costs is around 70%. Is it worth it ? Probably not, but then most of us work for the achievement not just the money.

What is fair ? well, I have no clue how much it costs to run a modern country, but I can observe that at sometime in the last century governments in the West stopped working out the tax take on the basis of what was needed to do the things governments have to do ( army, police, education, hospitals, street-lighting etc ) , and shifted to thinking of the economy as a source of cash for them to use to achieve their ambitions and desires as politicians.

So the fairness question has now been redefined: what is the maximum they can take out without damaging the economy to the point that they can no longer achieve their needs and desires ? How can they extract max tax without putting off the wealth generators ?

I would suggest: a progrssive rate, as now, with a real ceiling of 55 %, no inheritance tax, and a "lifetime limit " ( the mirror image of the "lifetime allowance" in pensions ) of say £ 2 million. That's 40 years at £50k or 20 years at £100k. Once you've paid your £2 mill, you've done your bit for the government's coffers,and you then live tax free. That would bring all those millionaires back from Monaco, to spend their money over here instead, and give the rest of us an incentive to get on with it.

I hasten to add I'm nowhere near my £2 mill yet, and not likely to get there at my age !

I spend much of my working life in such places . . .
the main difference is that the 'tax systems' are neither properly enshrined in law nor is the 'tax' necessarily taken by the state - but at least they acknowledge the general corruption instead of pretending [as in UK] it dosn't exist - they are no less onerous for all that.

However the argument still devolves around three aspects -

o maintenance of 'bulk governance'
o subsidising the 'common infrastructure'
o proportional redistribution

and regardless of our relative consumption of these we still get a really bad deal in every one of them.

In general. because of the profligacy engendered by the compliant ease with which UK citizens allow themselves to be fleeced, everyone is taxed unfairly because so much is squandered.
Once we understand the actual prices we should be paying instead of the costs we are subsidising, then we will be in a better position to determine 'fairness'. As it is we just feel the theivish disposition of career politicians and their cadres.

A fair amount of tax is one that is simple to understand and not unduly onerous. However the amount must vary depending upon whether the population wants the state to provide or whether they want to provide it themselves.

There is absolutely no reason why any entity should receive a tax break unless it provides something for society in return. For businesses that is jobs for those that can't cerate their own, and therefore the tax break (if any) should be attached to the third party jobs created. At the moment we have the mildly crazy situation where we charge employers for providing jobs.

All things should be equalised and standardised. There is no good societal reason why the self-employed should pay any less, nor receive any less social benefits than the employed.

And a 'self-employed' person should bear the same tax burden regardless what form they operate in. For me that would involve hiking the starting corporation tax rate on companies above that for employment/self-employment on the grounds that the state would prefer that a small company invest its profits (thus gaining a large tax relief) rather than extracting them. I would then make the corporation tax rate work like income tax in reverse - taxing less as profits got higher until we got down to whatever percentage is required to make the UK competitive in the global market.

To balance this I would allow any corporate body to elect to tax its members as a partnership if they so wish.

Discussing what's a fair level of tax in terms of a percentage is a red herring in my view. Whilst a flat rate tax would be about as fair as it can get that concept wouldn't work for the UK.

Regarding contractors/freelancers, something dear to my heart, comparing £50K as a permie with a contractor does make sense for one simple reason - you get paid more as a contractor. Consider the contractor who earns £50K as an employee. The total tax burden (inc Employers NI) is about £14K. When this person goes contracting they will probably earn a darn site more, which conservatively let's say is £75K. The total tax paid on that, via a ltd company with dividends, is £18K. HMRC gets more and they get a flexible workforce.

The way I see it, it's a win-win for the contractor, the flexible workforce and HMRC.

Where's the problem?

@Mike Carter:
I struggle with the concept that tax as a % should increase as a proportion of income - isn't it to do with Marginal Utility ?

[see also http://www.guardian.co.uk/theguardian/2008/apr/04/2]

The more they have, the less they miss it - and the converse.

Which is why Gordo should never have withdrawn the 10% rate in favour of a VAT reduction ...

@Rebecca

Surely any concept of fairness must be linked in to what's receivable in return for taxation.

I struggle with the concept that tax as a % should increase as a proportion of income. The guy who is paying a marginal rate of tax of 40% receives no more for it than the gal paying a marginal rate of tax at 10% even though they are eligible for the same flat-rate benefits.

It has always struck me as odd that we say to a person earning 150K that they deserve to pay more tax because it's fair and that allowing them to spend their own money is not fair.

What I struggle to see as fair is the IR35 regime where there is the highest marginal rate of tax and the lowest eligibility for any form of benefits. Whichever way you cut it that seems unfair.

I also struggle with "Working Familes Tax Credits". I cannot see how it's fair to single people to subsides (via taxation) other people's decision to breed.

Still, I doubt it'll ever become more fair...

@Rebecca:
But if you are considering the total tax to the Govt then you should include the employer's NI since that's a consequence of the employment, just as you consider the CT in the director's case.

Oh - and you should for the sake of comparison also include the worker affected by IR35 - from ir35calc.co.uk:

10k: 1,315 13%
25k: 6,849 27%
45k: 14,226 31%
100k: 38,615 38%

Any chance you could add a fourth 'bullet' in each case in your article ?

And you really should make the Director case a little more realistic by setting a salary level of £10k, otherwise if that's on a 40-hour week, 48-week year she's earning less than the NMW.

In the Co. director case and self-employed cases, that 100k is the total cost to the business, whereas in the employee case, the cost to the business is more than 100k due to employer's NI. So shouldn't you consider that ?

Also things like paid holidays - the self-employed and Co. director may have to work without significant holidays, whereas the the employee will get an entitlement to holidays, sick pay, maternity/paternity, training etc. which is on top of his wage.

Additionally, I thought most taking out via dividends were advised to not appear to be "having a laugh" by the HMRC and would take £10k as salary ?

taxation is not fair - its just taxation. But is the system fair? It has complex rules, they move the goalposts, and they talk in nonsense jargon - 3 reasons why it is not fair.

Rebecca
Thank you for posting this question, which I hope will spark a good and varied debate on the subject.

From my point of view I would like to comment on not so much a comparison of the tax paid by each category of tax payer as you define them but on how they vary in their over all contribution to the system as a whole.

[m denotes – millions T/O – Turnover , emp = employees]

The NSO tells us that there are:
3.4m one man band’s which generate £ 222,383m T/O
(incl ST. LTD and small Partnerships)
1.28 m businesses with between 1 - 99 emp which generate £1,017,532m in T/O.
19.36k businesses with > 100 emp - which generate £1,770,251m T/O.

If we want to recover as an economy I would proffer the suggestion that we should not be focusing on " what is fair" in a population that is generating £222,383m of T/O within our economy but we should be focusing on "how we can encourage and support" business within the 1 - 99 emp category. Surely this is a far more worthy course for our government to focus on, than getting lost in the detail.

We all know and can see the inequity in the numbers in the example provided by Rebecca, and we all know the arguments as regards risk v rewards at these individual levels.

If government however introduce measures to address this I feel it would penalise a portion of company directors within the population who are truly looking to grow and develop their business.

In posting this comment I tried to find information on the number of Co's, who fall into the somewhat maligned category of PSC’s, to try to put a number on the perceived tax lost, but there is very little available data as regards this.

If I make even a best guess-timate that out of the 3.4m
- 1m of these fall into that category. Then perceived tax lost is
- If their average income is £45k , - £3,889m
- If their average income is £100k , - £4.845m

So let’s just call it £4,400m of perceived tax lost

Now….if each of the 1.28m with 1-99 emp could add
- £20k to their profits this results in £5371m of CTax
- £20k to their profits and add 1 emp earning £25k this result in £5371m of CTas and £7450m in PAYE & NIC – TOTAL £12,821m

So in conclusion, while I have not necessarily answered Rebecca’s question of “how much is fair?” I hope I have put forward an argument that the Government should “play fair”
Reward those individuals in your population who are helping to grow businesses and rebuild our economy – don’t penalise them further. Stand back and look at the bigger picture.

If each of the company directors of the 1.28m businesses with 1-99 employees can be encouraged to aim for the second of the scenarios in my analysis above would I mind if they got a bit of a personal tax gain from it…… absolutely not!

Fiona Purves
Defacto fd - www.defacto-fd.co.uk