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How to reduce the tax burden

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Chancellor Rishi Sunak has tasked Treasury officials with devising tax reforms to reduce the tax burden on working people. Rebecca Cave explores ways this could be achieved.

4th Jan 2022
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I asked the great hive mind of AccountingWEB members for their ideas on reducing the tax burden and whether this meant simplifying tax compliance, or making the whole tax system in some sense ‘fairer’.

Tax the rich?

First off the blocks in any discussion of this nature is a call to tax the rich more and the poor less, on the basis that most ‘working people’ are low earners. This may be the case, but there are still many high-earning employees, eg bankers who receive famously large bonuses.

All those bankers’ bonuses are currently taxed at 45% plus employees NIC at 2% (rising to 3.25% in April 2022), plus employer’s NIC at 13.8% (rising to 15.05% in 2022).  That’s a lot of tax and NIC.

As AndyC55 recalled the top 1% of income taxpayers earn a disproportionate amount of the national income, about 14% (on 2018 figures), but they pay around 28% of all income tax collected in the UK. It’s not clear if those amounts of “tax” also include national insurance contributions.

Combine tax and NIC

Which brings us on to the hoary old chestnut of the merger of income tax and NIC, which as Philrob argues should include employers’ NIC.

This is an idea which has been knocking around since at least the 1970s. Every few years there is another review, where the findings are welcomed then tucked away in the too difficult drawer.

In the last six years there have been at least three reports on how income tax and NIC could be merged or closely aligned:

Still nothing happens.

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Replies (32)

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By Paul Crowley
04th Jan 2022 14:53

Why do governments even pretend to care
They have been informed numerous times
Hypocrisy given a brand new tax just invented by the person pretending to restart a tax rethink
His new tax is reserved excusively for working people in the full cost, but half price for those getting dividends

Version 15: just shift the NI threshhold start point to £20,000, but keep the band width the same

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By ireallyshouldknowthisbut
04th Jan 2022 15:46

Bin quarterly reporting for MTD, obviously. Huge red tape savings for "working people"

Plus as above level out taxes on passive incomes to working incomes so as to reduce taxes on incomes vs taxes on wealth, and put back in the 50% rate and a new 60% rate over £250k which might push some incomes outside of the UK, but would overall be a big plus I imagine. Warning: Tory Donors wont like it.

On a small scale its long passed due to sweep away all the fiddly stuff such as married couples allowance transfer and all the rest of it which is worth a pittance but must be expensive to administer.

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Replying to ireallyshouldknowthisbut:
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By Paul Crowley
05th Jan 2022 01:15

Agree
The bottom end small stuff is such a time consuming pit of triviality

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By Open all hours
04th Jan 2022 15:38

Struggling to take this seriously. A decision has been taken to increase the tax burden exclusively on working people. So it’s that easy, withdraw the Health & Social Care Levy. Job done. It will only ever go to the NHS anyway, they have armies of people dedicated to preserving their empires with no thought beyond their own salaries perks and pensions.

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By Hugo Fair
04th Jan 2022 15:53

I dispute that "All those bankers’ bonuses are currently taxed at 45%" ... none of the ones that I know (or in some cases have processed) do so across the whole bonus.
From the simplest options for pension contributions through various legally mandated 'schemes', only a portion is hit with that rate of tax.
And even less so for the uber-rich, who can afford the the luxury of determining where their pay is received, as well as in what form - or even via facilities that are deemed 'part of the job'!

Far be it from me to cast aspersions about the Chancellor or his associates, but as the old expression goes 'turkeys tend to be disinclined to vote for Christmas'.

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Tornado
By Tornado
04th Jan 2022 16:15

Whilst all logic suggests that there are numerous ways to improve our tax system, the most difficult hurdle to overcome is that tens of thousands of Civil Servants would inevitably lose their jobs as various aspects of taxation merge into one. Although HMRC is supposed to be a single entity, it is probably still just as much a group of separate departments operating independently as it was before HMRC was formed, particularly when it comes to Work and Pensions and VAT.

What Government has the guts to simply taxation at the expense of tens of thousands of jobs? ... a Government that never wants to be in power again of course.

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Replying to Tornado:
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By Hugo Fair
04th Jan 2022 16:28

Don't disagree with your central premise ... but FWIW "Work and Pensions" falls within the remit of DWP (the clue's in the name) not HMRC - who merely act as sub-contracted collection agents for some aspects (a bit like they do for Student Loans or indeed IT for the devolved governments).

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Replying to Hugo Fair:
Tornado
By Tornado
04th Jan 2022 17:16

You are right of course, and I could have used a better example, but the point I was trying to highlight is that simplification of taxation will lead to many redundant jobs in the Civil Service and numerous support businesses ..... such as Accountants. But it would be redundancies in the Civil Service that would be the biggest problem.

Ironically we have a department called the Office of Tax Simplification and I am reminded of Sir Humphrey who was asked all those years ago to prepare a Report as to how the number of Civil Servants could be reduced, and his reply was that he would be delighted to do this but he would need to create a new department of say 500 people, new premises to work from and a substantial budget.

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By mbee1
05th Jan 2022 08:02

So the Chancellor has asked "Treasury officials" to look into this. Who are these officials and what experience, if any, of taxation do they have? I suspect they're career civil servants with no actual experience of front line taxation. It's the accountancy and tax profession he should be asking, people like Rebecca Cave who can give objective advice.

Why did Government set up the OTS if they don't do anything with the proposals they make anyway!

Finally, I'm old enough to remember a top rate of tax of 98%. 83% higher rate plus a 15% Investment Income Surcharge. Now that was eye watering.

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Replying to mbee1:
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By johnjenkins
05th Jan 2022 09:30

I think we can now say that the OTS is well and truly defunct.

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Replying to johnjenkins:
By SteveHa
05th Jan 2022 10:08

johnjenkins wrote:

I think we can now say that the OTS is well and truly defunct.

It's likely already been replaced by the OTC (Office of Tax Complication). Certainly based on recent year's experience.

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By Winnie Wiggleroom
05th Jan 2022 08:34

Just get better at collecting taxes, lets take CT for example, we have clients that owe years of CT but that have plenty of assets, absolutely ridiculous that a company can earn large profits in M1 of trading and not have to even report those profits nevermind cough up the money for the tax for nearly two years, and even then it will be a few more years until HMRC get serious, and what if that company ceases during those two years with no assets

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By Open all hours
05th Jan 2022 09:03

Complication has been built into the tax system because politicians think taxes should be ‘fair’. We can’t take VAT off domestic fuel because it is not fair to give a tax break to the better off (apparently). If we are going to have fair we cannot expect simple. It is time for a serious debate and hopefully we will conclude that simple trumps fair. Let’s be rid of the child benefit charge, restore the Personal Allowance for all and above all transform the whole VAT regime.

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By NeilW
05th Jan 2022 09:43

You can't reduce the tax burden on working people. The whole point of taxing anybody is to stop working people being hired by the private sector so the public sector can hire them instead (directly, or indirectly via funded outsourcers).

That's the only operational purpose of taxation.

What you can do is hide it, and we already have a mechanism for that. It's called Employer's National Insurance. That achieves the required reduction in private sector employment via the most direct method - utilising a modern understanding of tax incidence and tax salience.

It would be perfectly possible to scrap corporation tax, income tax, employees NI, business rates, VAT and stick it all in the slot currently marked "Employer's NI". Since business collects all that tax anyway and pays over the cash to the Exchequer, nothing much would change by adjusting the calculation methods. Certainly not in aggregate. About the biggest change would be requiring the self-employed to operate PAYE on their drawings.

In essence the De Facto basis of taxation, business pays over all the tax, would just become the De Jure basis - calculated as a simple percentage of any value transferred by the business to its workers - and we would have true tax simplification.

Which is why it will never happen.

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By Arcadia
05th Jan 2022 09:39

Don't forget that other hidden tax - student loan repayments. Another burden on middle income people. Those who never earn enough get the loan written off - fine. The wealthy either didn't need the loan, or Daddy pays it off after a while. The burden falls on the uncomplaining middle as always.

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By johnjenkins
05th Jan 2022 09:35

Probably what Rishi is really asking is "how can we make the self-employed with a turnover of under £85k become MTD compliant? Cos he knows he's going to have a major battle come 2024.

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By Gerry Brown
05th Jan 2022 09:40

As others have pointed out the simplest way to reduce the tax burden on working people is to tax capital more heavily than income - as was the case when I started working in tax in the 1970s.
We could start with abolishing the ISA; what is the point in having ISAs and a personal savings allowace and dividend allowance? CGT rates could be increased - again what is the point in having separate rates for property and other assets?
Pensions tax relief could be given at basic rate only - basic rate relief would remain a huge incentive to save for retirement.
Why should IHT business and agricultural relief remain? The reasons for their introduction - one hundred years ago - are no longer valid.
The IHT loopholes for UK resident non-doms should be closed.
The tax saved should be used to ensure that the NIC levy is reversed and the basic rate band extended. That would help all employees but predominantly the lower paid.

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Replying to Gerry Brown:
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By unclejoe
05th Jan 2022 12:03

Absolutely agree!! In 2014 I attended an investment talk “How to become an ISA millionare”. The speaker explained his investment strategy and explained how he had built an ISA pot of £8m. That ISA pot could be well in double figures now. Of course only the already well off can take full advantage of a couple being able to save 40k a year into fully tax free investments. I suggest that this is just a national disgrace where queues for food banks seem to be growing longer every day.

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By Gerry Brown
05th Jan 2022 09:40

As others have pointed out the simplest way to reduce the tax burden on working people is to tax capital more heavily than income - as was the case when I started working in tax in the 1970s.
We could start with abolishing the ISA; what is the point in having ISAs and a personal savings allowace and dividend allowance? CGT rates could be increased - again what is the point in having separate rates for property and other assets?
Pensions tax relief could be given at basic rate only - basic rate relief would remain a huge incentive to save for retirement.
Why should IHT business and agricultural relief remain? The reasons for their introduction - one hundred years ago - are no longer valid.
The IHT loopholes for UK resident non-doms should be closed.
The tax saved should be used to ensure that the NIC levy is reversed and the basic rate band extended. That would help all employees but predominantly the lower paid.

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Replying to Gerry Brown:
paddle steamer
By DJKL
05th Jan 2022 15:29

Basic rate relief is imho not sufficient to overcome the tax to be suffered on future pension receipts (even with the 25% tax free preserved, which I doubt it long term will be) and coupled with uncertainty re how future governments will behave re pensions.

The point of encouraging saving is simple, reduce the burden on the state (and the taxpayers at that time) from having to provide for an ever increasing part of the population who pay lip service to saving for their own future. (Try asking around your workplace how many under 45 save for their own retirement absent what they pay to the derisory employer AE scheme they enjoy, in my experience unless government/council employees usually very little)

If no ISAs or pensions etc that wall of money will in large part go straight into residential property making it even more difficult for younger people to buy their own home, these "perks" assist in making the residential market slightly respectable, without them, enticing funds elsewhere, we will all become landlords.(Well those who have the saved funds)

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By NotAnAccountant2
05th Jan 2022 09:53

While giving tax cuts to the less well paid and recouping it from the better paid will, in the short term,be progressive, history tells us that companies will eat into any 'surplus income' via below inflation pay rises and use that to make more profit.

The only long term solution is to focus on an acceptable minimum level of (after tax) income.

Instead, we have a system where the government has to (effectively) have negative tax rates for *working* people in order for them to eat and heat their homes. This government can (and does) characterize those working poor as benefits scroungers - which then feeds into the narrative that the rich should keep more of the money that the workers in a company generate. The 20 cut in universal credit was a tax rise disguised as a benefit cut.

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Replying to NotAnAccountant2:
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By legerman
06th Jan 2022 10:37

NotAnAccountant2 wrote:

Instead, we have a system where the government has to (effectively) have negative tax rates for *working* people in order for them to eat and heat their homes. This government can (and does) characterize those working poor as benefits scroungers - which then feeds into the narrative that the rich should keep more of the money that the workers in a company generate. The 20 cut in universal credit was a tax rise disguised as a benefit cut.

For all the faults of this Government, and there are many, the £20 a week top up was only ever intended to be temporary, and indeed was extended a further 6 months longer than originally planned.

The problem was, understandably, the recipients got used to it, so when it was withdrawn it felt very much like a cut.

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Replying to NotAnAccountant2:
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By spilly
06th Jan 2022 18:54

The current benefits for working people earning low salaries just allows companies to keep their pay rates down. Effectively, the Government is subsiding those businesses, enabling them to make higher profits, pay bigger dividends, and pay enormous salaries to their executives.

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By Mr J Andrews
05th Jan 2022 10:15

Rebecca
No mention of MTD within your article - which could have been headed ''How To Reduce The Tax Administration''. Administration under MTD is , of course , the imminent burden on countless working people. Did you not think this to be is an important avenue of exploration ?
The fact that Sunak has tasked Treasury Officials with so called tax burden reformation may mean he has had second thoughts about the MTD fiasco. But equally, without similarly consulting the Accountancy profession , I guess we can expect something on the lines of MTD2

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Should Be Working ... not playing with the car
By should_be_working
05th Jan 2022 10:23

"Chancellor Rishi Sunak *has tasked Treasury officials* with devising tax reforms..."

Well, there's your problem. The Treasury will only come up with reforms that suit the Treasury/HMRC (see MTD).

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By dsassoon
05th Jan 2022 10:32

Surely one of the simplest way to reduce the need for as much tax is for the Government to spend and waste less of our money in the first place ? Then they wouldn't need to raise as much tax, and can simplify the systems to collect it.

But of course, that won't happen, because all Governments want to employ as many people as possible, and spend as much as possible, so that 'the people' are as grateful and reliant on the them as possible.

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Replying to dsassoon:
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By tedbuck
05th Jan 2022 12:16

Now that has hit the nail firmly on the head. Too much bureaucracy, too many Civil Servants most neither Civil nor Serving.

Too many managers doing little but create paperwork (Just look at the NHS) too many people being put in charge of sections of the economy with no experience of the are which they oversee (NHS again) - too many professional bodies creating rules for people to observe that really see no useful purpose, too many government departments creating more rules to get income from fines to finance their empires (Did I hear the FCA mentioned there?)
Been to a GP's surgery recently? A perfect example of bureaucracy run riot with little evidence of common sense or service to the public.
Tried to deal with HMRC recently? - or with an energy Company who are basically so incompetent that they are lucky to exist.
And it comes down to lack of supervision of too many staff with too little experience of real life. Sounds like politicians doesn't it? HMRC taking on novice employees and having them work from home just about takes the biscuit but they are doing it - small wonder they cannot answer letters or telephone calls.
So the MTD for ITSA is really because HMRC want to sit at home with their feet up and let the computers do the work but still get paid the same. Sounds like too many Civil Service arrangements which we, the tax payers, have to fund, like the pensions which give the CS very good incomes in retirement whilst the workers who actually do work have to struggle with much less.
I could rant on but until the NHS worshipping mentality is overcome nothing will happen except the death rates from non-covid illness will increase.
Happy new 2022!!!!!!

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By AthenaSolutions
05th Jan 2022 16:40

Interesting that these discussions don't seem to include a factor which impacts particularly service-based B2C small businesses, which is the VAT threshold. At £86k, the minute you earn just enough to support yourself and pay overheads, you're into VAT. And around 15% of your earnings are straight off to HMRC rather than using them to employ someone else.

Further, we need incentives for carbon / natural resource taxing. We need to shift onto transactional taxing on use of resources and away from labour. VAT does exactly the opposite.

So - merge NI and income taxes. Have a CAT not a VAT. Triple the CAT threshold above the VAT threshold. And CAT is not recoverable - you pay on use of resources that you add to the service / product.
Finally - the wealth tax - this should be ground rent. Which will pay for any loss of the VAT take.

And PS - add in minimum basic income. Because all parents should be able to house, feed, clothe and warm their children.

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Replying to AthenaSolutions:
paddle steamer
By DJKL
05th Jan 2022 16:53

AthenaSolutions wrote:

Finally - the wealth tax - this should be ground rent. Which will pay for any loss of the VAT take.

A.

Surely not a rent. I own the ground under my home, if you want HMG to take more from me be honest, call it what it really would be, Ground Tax.

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Replying to DJKL:
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By AthenaSolutions
05th Jan 2022 19:17

Depends on your political views... do you "rent" the land from society or do you own it without obligation to society :-) Either way, the concept that you are using a key asset - land - and need to make a return - still stands. It would mostly hit very large landowners who currently pretty much choose to pay tax or not.

Good info here: https://annualgroundrent.scot/ if you're interested.

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By justsotax
05th Jan 2022 17:38

'tax the rich'.....is something I rarely hear from people other than those who fall in the higher rate brackets, who then insist that they meet the vast majority of the tax take whilst the little people contribute next to nothing.

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By Roy Price
06th Jan 2022 09:41

The tax burden could be reduced if the abhorrent waste of public funds could be better controlled. E.g. recent announcement that £5bn + of the Covid Loans will not be recovered; latest army vehicle not fit for purpose costing £billions all wasted.

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