Income tax rates are too complex
Rebecca Cave believes the 2016/17 income tax rates are far too complex to explain easily.
It should be possible to explain to an ordinary taxpayer what tax rate they will pay without resorting to detailed questionnaires and calculators.
That won’t be possible following the changes introduced by the Finance Bill 2016.
The changes to personal tax rates are so convoluted that people drafting the Finance Bill felt it necessary to include a table to summarise them.
Here it is:
|Rates payable on:|
|Type of taxpayer:||Savings income||Most dividend income||Other income|
|UK resident who is neither Scottish nor Welsh taxpayer||Savings rates||Dividend rates||Main rates|
|Scottish taxpayer||Savings rates||Dividend rates||Scottish rates|
|Welsh taxpayer||Savings rates||Dividend rates||Main rates while s11B is not in force; Welsh rates if so|
|Non-UK resident individual||Savings rates||Dividend rates||Default rates|
|Non-individual, except trustees in some circumstances, who are subject to trust rate or dividend trust rate||Default basic rate||Dividend ordinary rate||Default basic rates|
Type of taxpayer
Before you can tell the taxpayer what tax rate they will pay, you need to know what type of taxpayer they are. This leads to questions about where the taxpayer’s main home is, and (for instance) if they are a member of the Scottish Parliament. If the taxpayer lives outside the UK they may be non-resident, in which case you need to use the statutory residence test to determine whether the taxpayer is resident in the UK for the particular tax year.
By “Scottish rates” the drafter means the Scottish rate of income tax (SRIT) plus the balance of UK default rates. To determine the Scottish rates you take the default rates, deduct 10% points then add on the SRIT, which also happens to be 10% for 2016/17. However, in 2017/18 the SRIT may not be 10%, and it may vary for each tax rate band.
The Welsh rates of income tax are not in force, but ITA 2007, s11B makes provision for them when they do come into being. From that point you will need to question the taxpayer as to whether they consider their main home to be in Wales, or whether they hold a position in the Welsh Assembly; other conditions may apply.
Type of income
The next batch of questions concerns taxpayer’s type of income. Many taxpayers will require an explanation of the difference between savings income and dividend income, and what falls into the catch-all “other income”. Of-course the journey to reach taxable profits from cash received is not straightforward, but perhaps some magic app will soon solve that for us.
Amount of income
The next step is to add up all the taxpayer’s income to see which type of income falls in which tax band (see 2016/17 table). To do that you need to know what order the income is taxed in. This is not immediately obvious (see HMRC guidance in SAIM1090). In brief savings income and dividend income are treated as the top slice of income, but dividends sit on top of any savings.
|2016/17Savings band: 0-£5,000
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| Default rates0%
Don’t forget to deduct the relevant allowances from the relevant income. The personal allowance and blind person’s allowance can be set against any type of income, but the dividend allowance (£5,000) can only be set against dividends and the savings allowance (£1,000 or £500) only goes against savings income. Remember the savings rate band in the table above applies in addition to the savings allowance, if “other income” hasn’t already covered it.
Non-individual taxpayers (ie trusts) are not eligible for personal allowances, savings allowance or dividend allowance. This means a trust will pay at least 7.5% (possibly higher rates) on all of their dividend income, with no tax credit or allowance to reduce the tax due. In general trusts don’t benefit from the lower tax bands which are available to other taxpayers.
All clear now?
Personal tax is now too complicated to be easily grasped by an ordinary taxpayer. We need help from tax software just to work out what tax rate will apply. But who is checking that the software delivers the right answer?