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Five fixes for the tax system

The Spring Budget is an ideal opportunity to shake up some worn-out concepts and assumptions embedded in the tax system, so Rebecca has drafted a Budget speech to do just that.

11th Feb 2021
Tax Writer Taxwriter Ltd
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Madame Deputy Speaker – I want to be honest with the House and the country; the UK needs to raise more tax revenue. The country has borrowed over £400bn to fight the coronavirus and to support businesses through the pandemic. That debt will need to be repaid eventually.

The crisis has also placed an enormous strain on the National Health Service, and has exposed the threadbare funding of certain key services. We need to strengthen our wonderful NHS by supporting it in its entirety, including mental health services and social care.

The NHS staff at all levels should be properly rewarded, so I am proposing that annual pay rises for health and social care service workers are tied to the annual percentage increase in state pensions. If our pensioners deserve a pay rise, our hardworking nurses and care workers certainly deserve the same.

To encourage more people to join our rejuvenated NHS, I will instruct the Student Loans Company to pause the collection of student loan repayments from individuals who accept a full-time position within the NHS. If that person remains employed by an NHS public body for at least five years, their entire debt with the Student Loan Company will be cancelled.

This ongoing support for the NHS and social care requires funding for the tax system, this money can’t be provided by endless increasing the national debt. The tax system requires restructuring.

These are my five structural proposals.

1. National Insurance Contributions are taxes

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Replies (28)

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By JCresswellTax
11th Feb 2021 16:24

Dividends the same rate as income tax? So a limited company director/shareholder has to pay tax of 39% to take a divdend in the basic rate band?

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Replying to JCresswellTax:
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By Paul Crowley
11th Feb 2021 18:04

Agreed ridiculous

If so then for fairness an extra tax on drawings from all business, in addition to tax on the business profit.

Franked investment income cannot exist in the system described as clearly a dividend loophole.

Holding companies must pay proper tax on their dividends

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Replying to JCresswellTax:
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By Paul Crowley
11th Feb 2021 18:08

Your tax rate is way too cheap
You forgot to add national insurance to the dividend tax

Or maybe to both tax rates

Edit
Just read it again
Corp tax has the higher NI addition being employers

so 19 plus say 13 then 20 plus say 10. I make that 62%

If that is what happens if we rejoin EU, we need help

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Replying to JCresswellTax:
By cfield
04th Mar 2021 10:33

Not quite as bad as that. 19% + 81% x 20% = 35.2%.

But of course there would be 12% NI on the dividend too in Rebecca's fantasy world, so 44.92% really.

The higher rate for someone on £150k would be 22% CT + 78% x 52% = 62.56%.

What a great incentive to work hard, start up a business, invent something, invest in this country!

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By Paul Crowley
11th Feb 2021 17:58

Got it

This is your version of telling us that the budget has been moved to 1st April.

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By Paul Crowley
11th Feb 2021 18:23

Just one thing missing:

No NI contributions means no state pension for those not currently receiving state pension

All reasonable tax payers should have provided for their retirement. We will assist by making a compulsory pension scheme contribution on all income, including capital gains, at a rate determined by actuaries.
That current rate exceeds but will commence at 10% and will increase 1% per annum until equilibrium is reached, the pension you pay will exactly equal the sum available for all costs of your retirement
This is not a tax and will be put aside to provide you will a secure future

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Replying to Paul Crowley:
RLI
By lionofludesch
13th Feb 2021 10:48

Paul Crowley wrote:

That current rate exceeds but will commence at 10% and will increase 1% per annum until equilibrium is reached, the pension you pay will exactly equal the sum available for all costs of your retirement

All you need to know is the pensioner's date of death.

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Replying to lionofludesch:
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By Paul Crowley
13th Feb 2021 12:44

That is the problem
Statistically (before covid) it kept moving back
And what to do with all the built up money if taxpayer dies before claiming?

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Replying to Paul Crowley:
RLI
By lionofludesch
13th Feb 2021 14:52

Paul Crowley wrote:

That is the problem
Statistically (before covid) it kept moving back
And what to do with all the built up money if taxpayer dies before claiming?

He takes it with him.

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By unearned luck
12th Feb 2021 02:37

"There is no good reason why income and capital gains should be taxed at different rates".

This statement is untrue. The OTS's suggestion for unification of rates came with a proviso for relief for inflationary gains. The choice lies between the simplicity of lower rates for CGT (which seem unfair to people who have not thought the matter through) or the complexity of an indexation allowance or of a taper relief.

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Replying to unearned luck:
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By AndyC555
13th Feb 2021 08:07

Indeed.

Without indexation being accounted for, CGT would be a tax on inflation.

And CGT is often just one tax in a long line if you invest in a company- you are taxed first on income earned, then the company pays corporation tax on its profits, then you pay CGT on any gain on the shares.

So If Capital Gains are taxed at the same rate as income, where is the incentive to save?

So, no good reason other than some very good reasons.

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By Open all hours
12th Feb 2021 08:45

‘I want to be honest’ infers an aspiration, maybe an intention, but not quite a commitment.

Proposals for nurses are worthy but completely unaffordable and unworkable.

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By lordburnside
12th Feb 2021 09:53

I was with you until rejoining the EU.
Why would we want to be ruled by Europe they are worse than our lot.

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By lordburnside
12th Feb 2021 09:53

I was with you until rejoining the EU.
Why would we want to be ruled by Europe they are worse than our lot.

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By Donald MacKenzie
12th Feb 2021 10:36

You started so well but then could not resist an Anti-brexit finish.

Brexit kills off chances of sensible Scots voting to leave the UK. With a fiscal deficit three times what the EU would accept, and opposition from Spain, there is no way Scotland would get in the EU. To leave of the UK (60% of our outbound goods) would be stupid even by nationalist standards.

There will be winners and losers from Brexit. Companies will open branches in EU but EU based companies are also opening operations here. Nissan has chosen the UK for its battery plant for European production.

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By johnfrancis
12th Feb 2021 10:45

The proposal is to abolish employer's NIC and raise Corporation Tax. We see a lot of headlines about global giants who are quite good at not paying Corporation Tax (or business rates). But they do employ people, and they do generate revenue from VAT and employment taxes. Unless you can really bolt down on the UK share of those companies' massive profits (and it doesn't look as either we or anyone else are close to doing so), that shift in the burden of taxation is just a free gift to them.

I agree, however, that employer's NIC is a business disincentive. I distantly remember a lot of fuss in my childhood about something called 'Selective Employment Tax'. Perhaps the effect is not dissimilar.

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Replying to johnfrancis:
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By Hazel Accounts
12th Feb 2021 11:20

This was also my first thought!

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Replying to johnfrancis:
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By lionofludesch
13th Feb 2021 11:00

johnfrancis wrote:

I agree, however, that employer's NIC is a business disincentive. I distantly remember a lot of fuss in my childhood about something called 'Selective Employment Tax'. Perhaps the effect is not dissimilar.

Well, it depends. Selective Employment Tax was also about subsidising manufacturing jobs, where the SET was refunded with a 7/6 per employee, per week bonus. However, it's true to say that it was a failure as a policy.

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By lordburnside
12th Feb 2021 10:58

Corporations do not pay tax. Because the tax they pay is passed on in reduced dividends to shareholders, lower wages for their staff and higher prices to consumers. Tax Amazon more and their prices will rise so we will pay more for what we buy.

Its not just companies dodging tax - wives who don't work put in partnerships to use more basic rate, good old wife's wages, paying dividends instead of wages - these are just the same fiddles. Big companies transfer profit to other countries. Big earners transfer money to the misses!

Not sure is employers NI is a disincentive as we had low unemployment before Covid.

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Character from Adam Sandler film "50 First Dates"
By 10sectom
12th Feb 2021 15:04

Nooooooooooooooooooo!! It was going so well. Some great ideas. Then ruined with a plea to go back into the EU. Its not all about trade!

But my main issue is the erosion of the difference between employed and self-employed/business owners (not just in this article - but in general). Employment provides a level of security (income, tenure) that business owners do not have. The latter take significant risks (just getting paid, for one) that employees do not. Self-starters are the fuel of our economy and they should be entitled to dividends out of taxed profits at 0% personal/dividend tax. The reforms need to go back in the opposite direction to that proposed here. Frankly, I despair these days for anyone with the guts and drive to start their own business.

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Chris M
By mr. mischief
12th Feb 2021 18:09

With £400bn to repay, £2bn to £3bn measures are diddly squat. So in addition to all your suggestions I will throw in the following game changer - both in revenue and in increasing the incidence of talented people actually ending up running things:

Inheritance tax - first £2m 0%, thereafter 100%. All Land Registry Property transfers for value above £2m to be potentially taxable at 100% unless HMRC has certified it as tax paid.

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RLI
By lionofludesch
13th Feb 2021 07:45

Now is not the time to be raising taxes.

Five years down the line, maybe.

It's a mistake to think that the country's economy can be run like a household budget. Even before Covid, we already had borrowings repayable 50 years from now.

The economy has contracted by 10% in the last year. Get it back to where it was and only then start thinking about tax increases.

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By AndyC555
13th Feb 2021 08:19

"Dividend income will be taxed at the same rates as all other income."

You what? Company pays 19% (no, sorry you're putting up CT so maybe more) then shareholder pays up to 45% on the dividend?

10,000 profit - first goes the £1,900 CT, then 45% on the £8,100 left = £3,645, so £5,545 total tax?

And for the poor sod between £100k-£125k now paying at a marginal rate of 60% on his dividends. That's a total marginal tax rate of 67.6%.

Don't forget to add in the 'shirt off your back" tax to that.

"Let me tell you how it will be
There's one for you, nineteen for me
'Cause I'm the taxman
Yeah, I'm the taxman

Should five per cent appear too small?
Be thankful I don't take it all
'Cause I'm the taxman
Yeah, I'm the taxman

I'll tax the street
(If you try to sit, sit)
I'll tax your seat
(If you get too cold, cold)
I'll tax the heat
(If you take a walk, walk)
I'll tax your feet.....

...And you're working for no one but me (taxman!)"

Taxman - The Beatles

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Replying to AndyC555:
By cfield
04th Mar 2021 13:14

The voting age was 21 back then so George wouldn't have been able to vote against the extortionate income tax rates of the time until at least 1964. However, as a working class Liverpudlian lad, I doubt very much he would have voted anything other than Labour (good old Harold).

It's only when ordinary people do well in life and start feeling the brunt of those taxes that they suddenly realise how unfair they are. Whilst they're poor, they're quite happy to soak "the rich" and hear their pips squeak.

In those days, however, there was a lot more scope for astute tax planning, so all they needed was a good accountant and a half decent tax advisor. Unfortunately I was only 5 years old at the time and tax would have sounded like the sort of noise a duck makes, so I wouldn't have been much help.

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By lionofludesch
13th Feb 2021 11:07

The problem with Capital Gains Tax is that you can hold an asset for a long time and, when you sell it, the whole profit is taxed in one year.

I'd go for an increase in the rate of CGT - provided the computation provided some recognition for the length of ownership. Maybe some form of topslicing.

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Replying to lionofludesch:
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By Paul Crowley
13th Feb 2021 12:53

A bit like State pension, lump sums?

Forgot, all allowances done away with so that has gone

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By cfield
04th Mar 2021 13:51

Rebecca, I'm getting a sense of deja vu here. I'm sure you've come out with this sort of thing at Budget time before, and been told not to turn Accountingweb into some ghastly version of the Daily Mirror.

Anyway, no Chancellor with any political sense could ever come up with the sort of stuff on your wish list. He would wave goodbye to the pensioner vote with the idea of taxing them an extra 12% when they've already paid their stamp, as they would see it, and as for rolling back Brexit, that would cost him the Red Wall too.

It's about time Remoaners accepted the fact we're out of the EU, for good or ill, and won't be going back. I didn't see anything about a referendum in your wish list, by the way. Will the rest of us get any say in this reversal of the biggest democratic exercise in our in Nation's (real Nation's) history?

Like any decision in life, once you've made your mind up about something, you should embrace it fully and go flat out to make it work, rather than trying (and failing) to get the best of both worlds. The Freeports are a good start. I bet they're seething in Brussels about that. Let's really make them work and show what we can do outside the EU.

Quite frankly, they shafted us for 48 years while we were in the EU, fleecing and outmanoeuvring us at every turn, and their behaviour since then has shown them in their true colours. I'm just glad not to be part of that faintly Big-Brotherish club anymore.

I don't consider their vaccine shambles to be a true measure of how much better off we are (or will be) out of the EU as there are going to be other economic and political arguments that will make the case far better in years to come. However, it does make good propaganda for the time being, and if it helps to win hearts and minds, that's all for the good.

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RLI
By lionofludesch
04th Mar 2021 14:06

Did any of this happen ?

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