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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Is defeat in Stoke the beginning of the end for Paul Nuttall?

The Ukip leader was his party's unity candidate. But after his defeat in Stoke, the old divisions are beginning to show again

In a speech to Ukip’s spring conference in Bolton on February 17, the party’s once and probably future leader Nigel Farage laid down the gauntlet for his successor, Paul Nuttall. Stoke’s by-election was “fundamental” to the future of the party – and Nuttall had to win.
 
One week on, Nuttall has failed that test miserably and thrown the fundamental questions hanging over Ukip’s future into harsh relief. 

For all his bullish talk of supplanting Labour in its industrial heartlands, the Ukip leader only managed to increase the party’s vote share by 2.2 percentage points on 2015. This paltry increase came despite Stoke’s 70 per cent Brexit majority, and a media narrative that was, until the revelations around Nuttall and Hillsborough, talking the party’s chances up.
 
So what now for Nuttall? There is, for the time being, little chance of him resigning – and, in truth, few inside Ukip expected him to win. Nuttall was relying on two well-rehearsed lines as get-out-of-jail free cards very early on in the campaign. 

The first was that the seat was a lowly 72 on Ukip’s target list. The second was that he had been leader of party whose image had been tarnished by infighting both figurative and literal for all of 12 weeks – the real work of his project had yet to begin. 

The chances of that project ever succeeding were modest at the very best. After yesterday’s defeat, it looks even more unlikely. Nuttall had originally stated his intention to run in the likely by-election in Leigh, Greater Manchester, when Andy Burnham wins the Greater Manchester metro mayoralty as is expected in May (Wigan, the borough of which Leigh is part, voted 64 per cent for Brexit).

If he goes ahead and stands – which he may well do – he will have to overturn a Labour majority of over 14,000. That, even before the unedifying row over the veracity of his Hillsborough recollections, was always going to be a big challenge. If he goes for it and loses, his leadership – predicated as it is on his supposed ability to win votes in the north - will be dead in the water. 

Nuttall is not entirely to blame, but he is a big part of Ukip’s problem. I visited Stoke the day before The Guardian published its initial report on Nuttall’s Hillsborough claims, and even then Nuttall’s campaign manager admitted that he was unlikely to convince the “hard core” of Conservative voters to back him. 

There are manifold reasons for this, but chief among them is that Nuttall, despite his newfound love of tweed, is no Nigel Farage. Not only does he lack his name recognition and box office appeal, but the sad truth is that the Tory voters Ukip need to attract are much less likely to vote for a party led by a Scouser whose platform consists of reassuring working-class voters their NHS and benefits are safe.
 
It is Farage and his allies – most notably the party’s main donor Arron Banks – who hold the most power over Nuttall’s future. Banks, who Nuttall publicly disowned as a non-member after he said he was “sick to death” of people “milking” the Hillsborough disaster, said on the eve of the Stoke poll that Ukip had to “remain radical” if it wanted to keep receiving his money. Farage himself has said the party’s campaign ought to have been “clearer” on immigration. 

Senior party figures are already briefing against Nuttall and his team in the Telegraph, whose proprietors are chummy with the beer-swilling Farage-Banks axis. They deride him for his efforts to turn Ukip into “NiceKip” or “Nukip” in order to appeal to more women voters, and for the heavy-handedness of his pitch to Labour voters (“There were times when I wondered whether I’ve got a purple rosette or a red one on”, one told the paper). 

It is Nuttall’s policy advisers - the anti-Farage awkward squad of Suzanne Evans, MEP Patrick O’Flynn (who famously branded Farage "snarling, thin-skinned and aggressive") and former leadership candidate Lisa Duffy – come in for the harshest criticism. Herein lies the leader's almost impossible task. Despite having pitched to members as a unity candidate, the two sides’ visions for Ukip are irreconcilable – one urges him to emulate Trump (who Nuttall says he would not have voted for), and the other urges a more moderate tack. 

Endorsing his leader on Question Time last night, Ukip’s sole MP Douglas Carswell blamed the legacy of the party’s Tea Party-inspired 2015 general election campaign, which saw Farage complain about foreigners with HIV using the NHS in ITV’s leaders debate, for the party’s poor performance in Stoke. Others, such as MEP Bill Etheridge, say precisely the opposite – that Nuttall must be more like Farage. 

Neither side has yet called for Nuttall’s head. He insists he is “not going anywhere”. With his febrile party no stranger to abortive coup and counter-coup, he is unlikely to be the one who has the final say.