A “real” tax simplification programme including a commitment not to add to the UK’s tax code should be at the heart of government thinking, the ICAEW Tax Faculty has said in response to the Treasury’s “have your say” consultation for next month’s autumn statement.
The Faculty suggested a “one in one out, or even better a one in two out” principle and said new policy ideas should be subject to a pre-implementation review to assess their practicability and impact on administrative complexity.
It called for owners of new businesses to be encouraged to start putting money aside earlier to provide for income tax and NICs, and the removal of “distortions and disincentives” created by the clawback of the personal allowance, which results in a marginal tax and NIC rate of 62%.
The Faculty argued that the UK has one of the longest tax codes in the world, which continues to grow considerably every year.
“There is little point in simplifying some areas of tax if at the same time huge complexities are being created elsewhere, for example the high income child benefit charge, transferrable personal allowances, the loss of the personal allowance where income breaches £100,000, lower rates of tax on savings income and so on. Such changes make it very difficult for most citizens to understand and budget for their tax, especially where actual income changes late in tax year.”
Paul Johnson, director of the Institute for Fiscal Studies, has argued that there is “no plausible rationale” for the current structure of income tax and NIC rates. In a report titled “Tax without design” published in May, Johnson noted that there was a “sharp spike” in the marginal rate at the point where higher rate tax becomes payable. At incomes above £50,000 the marginal rate can jump to 60% or more as child benefit is “taxed away”.
He added: “Move further up the income scale and the marginal rate rises again once as income hits £100,000. From here, the marginal income tax rate is 60% as the personal allowance is ‘withdrawn’, resulting in a total marginal rate of 62%.”