The day before the Autumn Statement, everything you need to know about tax in the UK

Chris Nicholas gives a primer of the state of tax in the UK.

The Chancellor’s Autumn Statement tomorrow will likely bring more economics by a thousand cuts, with the least well off and welfare budgets again under assault. And there’s to be no let up in the tax regime’s unfairness. 

Lacking any underlying rationale and subverted by habitual expediency and vested interests, the tax system can legitimately be characterised as inequitable and inconsistent. The Chancellor isn’t helping. 

Taxes for companies and the wealthy are being reduced, notwithstanding the deficit and their already favourable treatment. Meanwhile taxes for less well off continue to go up. These are against a backdrop of marked economically and socially damaging income and wealth inequalities. 

Work versus Wealth

Work  earned income  is disproportionately heavily taxed. Conversely, all the returns of wealth  interest, rents, company profits and capital gains  are favourably taxed by comparison.

National Insurance, the 25.8 per cent tax on employment, is only paid on earned income. Unearned earnings then often have lower tax rates as well, particularly for dividends and capital gains.

Together the total personal tax paid on unearned income at standard rates can be as little as a third of that on exactly the same earned income; and at higher rate tax can still be less than half of that on the same earned income. Conversely earned income is taxed at least twice the standard rate as any of the returns from wealth; and at higher rates between 50-100 per cent more.

Deductions and allowances then go from limited to lenient across the spectrum from earned income through unearned income to company earnings and capital gains. The returns from wealth can also take advantage of extensive legitimated means of avoiding tax. 

As a result income from wealth is 17.5 per cent of UK personal incomes, yet accounts for just 5 per cent of the tax from personal incomes (the rest from earned incomes). Similarly, company profits are equivalent to 20 per cent of GDP, yet provide just 8 per cent of tax receipts. By contrast, earned incomes are equivalent to 55 per cent of GDP, yet provide 45 per cent of tax receipts, well over double the proportionate burden. 

All of which is ignoring wealth’s unique socio-economic primacy and ability to generate returns again and again from ownership alone. Wealth (capital) itself is all but untaxed in the UK

Progressive Taxation

Progression is overwhelmingly concentrated on earned incomes and in the bottom half of the income, let alone wealth, spectrum. 

Income taxes alone provide nearly all the progression for the tax regime as whole. With earned incomes accounting for 95 per cent of all income taxes, this then translates into work/employment carrying virtually all the progressive load.

Tax rates for earned income are only really progressive between bottom and middle incomes, and that's being reinforced by the Chancellor. Top rate income tax has already been cut from 50 per cent to 45 per cent, a regressive tax giveaway to the highest earners of £1.8bn a year. Meanwhile, those earning between £30,000-150,000 p.a. have been squeezed by a combination of increases in NI and further reductions in higher rate thresholds (albeit partly offset by the initial tax-free allowance increasing).

 

As a result of this weighting of progression towards the bottom, someone on £15,000 p.a and then earning an extra £1,000 will see their overall rate of tax increase 30 times faster than someone earning £100,000 p.a who then earns an extra £10,000. There’s also an important anomaly for many middle incomes: If you include employee NIC, earnings between £32,245 p.a and £42,475 p.a are actually taxed at a 5 per cent higher rate than earnings over £150,000 p.a.

At the same time the threshold for higher tax (the 40 per cent rate) is to be reduced further to £32,245 in 2013-14. This is a fall of over 20 per cent in real terms since 2010-11, pushing yet more low to middle income households into higher rate tax. This is the real squeeze in the middle (again, notwithstanding the increased Personal Allowance).

As incomes and wealth increase, progression is further flattened and distorted by the increasing benefit of allowances and deductions; the greater proportion of earnings benefiting from more favoured rates and treatment; and greater use of tax avoidance. All the while the focus remains exclusively on just income, ignoring wealth.

Inequitable Company Taxes

Company earnings are particularly favourably taxed compared to other types of earnings. They are then taxed at significantly lower rates, with no increased rates for greater profits. And many companies, particularly the larger ones, make extensive use of legitimated tax avoidance, particular offshore status and profits/costs transfers. The end result is an average effective tax rate of just 11-12 per cent on company profits made in/by the UK.

The Chancellor is now steadily cutting headline corporation tax from 26 per cent in 2010-11 to 22 per cent by 2014-15 – a tax giveaway of over £800m a year (cumulatively £4bn a year by 2015-16). The amount of tax collected will therefore remain nominally flat and fall in real terms for at least five years even with the hoped for recovery. At 2.4 per cent of GDP this is one of the lowest company tax contributions among all developed economies.

As with earlier cuts in company taxes, however, these cuts will not in fact deliver the hoped for improvements in output, economic performance or growth. Nor will they make a significant difference to the UK’s competitiveness.

Company taxes also have their own inequities. Far from being progressive to offset the advantages of size and market power, corporation tax ends up highly regressive in practise. Many of the top 100 UK companies pay an effective rate of under 5 per cent and quite a few nothing at all; and the top 5,000 about 11 per cent; whereas the average SME pays 80-85 per cent of the headline tax rate.

While the Chancellor is reducing taxes for larger companies, the 20 per cent small company rate and marginal relief for SME businesses have been frozen – reducing the difference between the smallest and largest company to at maximum 2 per cent. There are equally marked variations between types of business. The tax regime generally biases heavily against substantively productive activities, particularly those involving employment, and in favour of rent-seeking ones. 

These discrepancies in turn overlap with how much companies use tax avoidance. This gives some a market as well financial advantage; while putting others at a disadvantage – particularly domestic UK companies trying to play with a straighter bat.  

Systemic Avoidance

A recurring theme in the unfairness and inequalities of UK tax is widespread avoidance.  This not primarily about clever schemes and loopholes, but the currently built-in legitimating means of mitigating and avoiding tax.

While the Chancellor is closing some blatant loopholes, the built-in mechanisms for avoidance have been surreptitiously reaffirmed. The entire edifice of differential tax rates and treatment, company sheltering of profits, offshore ownership, residency statuses, trusts, transferring of profits etc continues unabated. 

Conservatively the country is missing out on £40-45 billion in directly avoided company and personal taxes and over twice as much again in currently legitimated tax "mitigation". Even if only some of this was recouped, we are talking substantial sums – enough to make a significant dent in the public finances.

Meanwhile the shortfall leaves all the more to be met by those still fully caught in the tax net: it takes the income tax from two million average households to replace each £10bn lost through avoidance.

Photograph: Getty Images

One time Barrister, economist and media and technology entrepreneur, Chris Nicholas now writes and lectures on economic policy and political economy.

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Richmond is a wake-up call for Labour's Brexit strategy

No one made Labour stand in Richmond Park. 

Oh, Labour Party. There was a way through.

No one made you stand in Richmond Park. You could have "struck a blow against the government", you could have shared the Lib Dem success. Instead, you lost both your dignity and your deposit. And to cap it all (Christian Wolmar, take a bow) you self-nominated for a Nobel Prize for Mansplaining.

It’s like the party strategist is locked in the bowels of HQ, endlessly looping in reverse Olivia Newton John’s "Making a Good Thing Better".

And no one can think that today marks the end of the party’s problems on Brexit.

But the thing is: there’s no need to Labour on. You can fix it.

Set the government some tests. Table some amendments: “The government shall negotiate having regard to…”

  • What would be good for our economy (boost investment, trade and jobs).
  • What would enhance fairness (help individuals and communities who have missed out over the last decades).
  • What would deliver sovereignty (magnify our democratic control over our destiny).
  • What would improve finances (what Brexit makes us better off, individually and collectively). 

And say that, if the government does not meet those tests, the Labour party will not support the Article 50 deal. You’ll take some pain today – but no matter, the general election is not for years. And if the tests are well crafted they will be easy to defend.

Then wait for the negotiations to conclude. If in 2019, Boris Johnson returns bearing cake for all, if the tests are achieved, Labour will, and rightly, support the government’s Brexit deal. There will be no second referendum. And MPs in Leave voting constituencies will bear no Brexit penalty at the polls.

But if he returns with thin gruel? If the economy has tanked, if inflation is rising and living standards have slumped, and the deficit has ballooned – what then? The only winners will be door manufacturers. Across the country they will be hard at work replacing those kicked down at constituency offices by voters demanding a fix. Labour will be joined in rejecting the deal from all across the floor: Labour will have shown the way.

Because the party reads the electorate today as wanting Brexit, it concludes it must deliver it. But, even for those who think a politician’s job is to channel the electorate, this thinking discloses an error in logic. The task is not to read the political dynamic of today. It is to position itself for the dynamic when it matters - at the next general election

And by setting some economic tests for a good Brexit, Labour can buy an option on that for free.

An earlier version of this argument appeared on Jolyon Maugham's blog Waiting For Tax.

Jolyon Maugham is a barrister who advised Ed Miliband on tax policy. He blogs at Waiting for Tax, and writes for the NS on tax and legal issues.