May 2012 21

The 2020 Tax Commission cuts the real Basic Rate from 40% to 30%25

What is the real Basic Rate? It isn’t 20 per cent. That is just Income Tax. You also pay Employees’ National Insurance of 12 per cent and Employers’ National Insurance of 13.8 per cent, taken out before the money even reaches your payslip. Add those taxes together and the real Basic Rate is 40 per cent. The 2020 Tax Commission proposes to abolish both forms of National Insurance as regressive, complex and ultimately pointless additional taxes on labour income. As a result, the 30 per cent tax rate is a like-for-like cut of a quarter in the real Basic Rate. There is also a higher Personal Allowance at £10,000. Low earners will pay a lot less tax.

Of course, not everyone pays full National Insurance and we understand that some people might be worried they’ll end up paying more as a result of the simplification, but actually the report will give groups like savers a much better deal, thanks to changes in other taxes.

For pensioners the critical thing is that taxes affect their income in two ways: first they depress the returns on their savings, then they take a chunk of whatever is left. Pension funds that have seen poor returns in recent years will immediately and dramatically benefit as share prices rise due to the removal of transaction taxes which are gumming up markets, capital gains tax that hits when assets are sold and cuts in corporate taxes which depress share prices. That will mean much better returns for pensioners.

So over the long term pensioners are going to get a better deal than they do now. A reasonable tax rate on an income that better reflects the earnings of the companies their pension is invested in. But that won’t benefit those who, thanks to being on defined benefit pensions or already having reached a certain stage in the process, are getting a fixed payment that isn’t improved by stronger investment returns. As we said in the report, transitional arrangements will be needed in the short term to protect existing savers. Some kind of lower rate for those who have invested and paid under the current system.

The self-employed will also be fine. Not only will small businesses be free of the suffocating task of complying with the current complex rules, under 2011-12 thresholds, any self-employed earners who earn enough to pay tax would pay less tax under our plan. For example, someone earning £25,000 would pay £735 less tax and someone earning £45,000 would pay £863 less.

It is important that we don’t become prisoners of the status quo. Our objective should be a simple and transparent system that gives everyone a better deal and improves the prospects for economic growth. The transitional challenges can be overcome without pensioners today paying more. And over time everyone will then get a much better deal.

Related Posts

Matthew is Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)



  • Lord Blagger

    Nice Fairy Story.

    Pity that the government has so much debt hidden off the books. 

    Bernie must be proud of them. 

  • ReefKnot

    I retire next year. These proposals will mean I pay about £100 per month more in tax on my pension. Another Granny Tax and a vote loser so far as I’m concerned.

    • http://twitter.com/mjhsinclair Matthew Sinclair

      No, as we’ve said there would be some “kind of lower rate for those who have invested and paid under the current system.” It wouldn’t mean higher taxes for new retirees.

      • PaulJ

        Your position that there would be “kind of lower rate for those who have invested and paid under the current system.” doesn’t fill me with confidence at all. You need to demonstrate exactly what the proposal is and precisely who it will apply to.

        Eg it is not clear what will happen with someone living on an occupational pension but not yet of retirement age. What if they have additional pensions but these aren’t active yet?

        The summary report gives no detail or confidence and the full report is too complicated and self publicising of “commissioners”.

        You need to give a lot of thought on how you pitch this, especially if the group you are vaguest about is the most likely to vote …

  • Solomon Hughes

    ” What is the real Basic Rate? It isn’t 20 per cent. That is just Income
    Tax. You also pay Employees’ National Insurance of 12 per cent and
    Employers’ National Insurance of 13.8 per cent, taken out before the
    money even reaches your payslip” – err, that’s fundamentally wrong. I don’t pay my Employer’s National Insurance – my employer does. That’s why it’s called “Employers National Insurance”. Because the Employer pays it. Employer’s don’t have to pass on cuts in Employers NI – and they don’t. If you make this kind of basic (deliberate) error, why trust the rest of your report ?

    • http://twitter.com/rorymeakin Rory Meakin

      There’s a discussion about this in the report. Check p262.

      Despite the fact the international evidence shows that wages would respond to a cut, we have recommended making this mandatory. See page 307 to 309.

    • http://www.annaraccoon.com/ SadButMadLad

      Err, you do pay for Employers NI, by getting a lower salary because your employer has to give the money to the government rather than you. If Employer NI was scrapped, some companies might not give it to the employee and instead spend it on other stuff that helps the company – leading to better job security. Other companies might give it to the employee if there was competition for the job and wanted to keep the employees – because a competitor might have decided to give the extra money as salary to attract more workers. And a minority might keep the extra money as bonuses for the bosses.

    • Jensham

      Labour costs are a large percentage of the cost of running any business and Employers NIC is 13.8% in addition to salaries, holiday pay, sickness etc. Take away that 13.8% and the result may just turn out to be increases in salaries or most likely more and secure employment. ALL taxes are ultimately borne by the consumer and prices are higher to the customer to cover the likes of NIC, business rates, compliance etc.
      Hardly, therefore, an error Solomon.

    • bubbles15

       You do pay it because it is money your employer cannot give you.

  • Steve Collins

    Although tax simplification is to be welcomed, this is not the solution to the economic mess we find ourselves in. Concentrating on sideshows like this is the fundamental error that right-wingers are currently making, and why they’re not getting anywhere in the polls.
     
    This initiative will only benefit those who really don’t need the extra money – the very rich. Giving a few extra quid a week to the millions of low paid through this proposal will do nothing to alleviate poverty among the working poor or provide the kick start that the economy needs.
     
    What will be cut to pay for the dramatically reduced tax take? The tax credits that allow the working poor to top up their income, thus allowing corporations to pay poverty wages? Housing benefit that allows the working poor to have a roof over their heads? Infrastructure improvements? Education? The NHS? Defence?
     
    As ever, the TPA claims to have the solution, but conveniently ignores the social and economic ramifications of its proposed policies.
     
    It is both morally and fiscally wrong to expect billionaires to pay the same rate of tax as someone who is on £7.50 per hour – and I’m sure that there’s a good few billionaires out there who would agree with me.

    And the fact that this has been dreamt up by the Institute of Directors and the editor of City AM speaks volumes for whose nests are being feathered…..

    • http://www.annaraccoon.com/ SadButMadLad

      And what are the social and economic ramifications of continuing on the same path of increased state spending on benefits to the degree that many people find it not worthwhile to work. Is it fair to expect the top 1% of the income tax payers to fund the benefits of the bottom 70%. The way to pay for the reduced tax take is to have a smaller state. Fewer qangos, less state handouts, no big projects like HS2, etc.

    • http://twitter.com/mjhsinclair Matthew Sinclair

      This is all just untrue. The proposals would substantially cut taxes for Basic Rate income taxpayers, as I’ve set out. Lots of money back in their pockets  to spend on their own priorities.

    • http://twitter.com/mjhsinclair Matthew Sinclair

      This is all just untrue. The proposals would substantially cut taxes for Basic Rate income taxpayers, as I’ve set out. Lots of money back in their pockets  to spend on their own priorities.

      • xcommuter

        Matthew, the more sensible solution is to reduce income tax, for everyone, to 20%, abolish the NI, replacing it with a medical insurance scheme, for everyone. If people who want medical care, then they do so through their insurance policy ( taken out of the hands of politicians). The needy can be catered for with a minimal medical protection for emergencies. No, socialist utopia where even those who haven’t contributed to our system get the same treatment (and sometimes better treatment) as those who have paid in for decades.

    • bubbles15

       You struggle with maths, I assume? What’s 10% of £100 compared to 10% of a million?

      • Matt

         still 10%, see simple maths. Why is it “fair” for someone earning a million to pay an even higher percentage of their earnings than someone who earns £100?

        Someone who earns £10k a year would pay £0, 0% of their income
        Someone who earns £25k a year would pay £4500, 18% of their income
        Someone who earns £100k would pay £27000, 27% of their income
        Somoneone who earns £1m would pay £297000, 29.7% of their income

        How is any of that unfair? It’s unfair to expect people that succeed to pay even more just because they are “rich”, also what is the definition of rich? someone who earns more than you?

    • http://profile.yahoo.com/WUIYHRR3QZUAMZGM4SOSYNBSI4 Very

      “Concentrating on sideshows like this is the fundamental error that
      right-wingers are currently making, and why they’re not getting anywhere
      in the polls.”
      they are not getting anywhere in the polls because they are NOT concentrating on things like this!.

      This is not a right or a left wing issue, it is an issue whereby, a country (the UK) over many years has tied itself in expensive knots in order to appear fair and who has spent massive amounts of money in order to appear fair – many don’t know what tax is, they think it is a magical pot of money the government conjure up from nowhere, if you came to their door and asked them directly for the money for many of the “services” like supplying a dog owner with a doggy poop bag, they would not put their hand in their pocket, it is only because the whole process of collection and distribution is obscured away from them that they let this ridiculous waste continue -  as soon as the situation becomes clear, the waste will stop and any path to get us there is worth taking!

  • John_Hill_and_Co

    This sounds like good stuff – but a flat tax at 30% would actually increase the tax rate on people who are currently basic rate taxpayers with multiple small sources of income.

    Consider someone earning £30,000 a year who has two part-time jobs and a self-employed business, earning £7,500 from each, together with a further £7,500 from savings or property income.  In the tax year 2012/13 they would pay tax at 20% on £30,000 less £8,105 personal allowance, which is £4,379. Under your proposal, they would pay 30% on £30,000 less £10,000 personal allowance, which is £6,000, or 37% more!

    The reason is that this person would pay no NI at the moment (other than the very small class 2 contribution of £138pa) because each source of income is below the NI threshold.

    My example is typical of self-reliant people who perhaps have left a full-time job but are making the best they can of part-time employment opportunities and using their talents to run a small business from home as well.  I would certainly not begrudge them the (relatively) low tax rate that they currently enjoy which helps to mitigate the lack of security in part-time and self-employed work.
    In my view a flat tax needs to have a starting rate of 20%, effectively abolishing NI, in order not to penalise such people.  This rate would also give a substantial tax reduction to people in full-time employment. 

    Other income that is currently taxed at 20% (for basic rate taxpayers) includes- occupational and state pensions;- savings income;- property income;- small company profits. Suppose you are a small business person earning say £40,000 profit (taken as dividends) through your own company – at present you pay 20% tax.  What would a 30% rate do to incentives for such people?  The flat tax proposal has not been thought through.

    • http://profile.yahoo.com/WUIYHRR3QZUAMZGM4SOSYNBSI4 Very

      I have been the person in your example of self employed in the past, and I am now the person in your last example, the small business person. In both cases, I welcome the changes proposed.
      In the case of being self employed in several part time jobs, I did this for a number of years, I took a “NI holiday” and so have made less NI  contributions – what I got from this period was experience, self reliance, and the ability to take on permanent employment at good rates because of the experience I gained. I would not have been able to go into the better paid jobs without going the self employed route because I was stuck in the catch 22 situation of having no experience and no qualifications.
      In the case of being a small business owner, the proposals would enable me to invest more effectively in my business in terms of the potential for employing someone else and in wider financial terms – I don’t want to continue running my business in the model of taking low wages with high dividends indefinitely, but the present system makes it difficult to transition and easier to continue like this as the burden of NI and the knock on effects to the cash flow is too great.
      As I understand it, the proposed system would allow me to leave my dividends entirely in the business to invest in the business from year to year. In the example you have given, I currently pay no tax personally, only corporation tax, as the dividends are subject to a tax credit, but my calculation show a net insignificant difference, the burden of tax would simply shift to me personally.
      The benefit, in the long run, of introducing a simpler tax system far out weighs the small number of discrepancies which would occur in the short term

  • Dr Spock.

    Once again complete and utter bollocks from the experts.

    • bubbles15

       That’s government for you. Thank goodness the TPA is talking sense, eh?

  • Nickpeat

    What about council tax?  This is the most unfair tax, particularly for pensioners and needs to be abolished as well. For my mother, who is in her 80s, it is 20% of her income.  Also, most people have no capital gains so would see no benefit from its abolition.

  • Etoliver

    Who can afford the capital to enable to take advantage of the capital gains tax?
    Come to that who can afford a tax free ISA. With private rents at £700 per month for a 3 bedroom property. All energy bills have risen out of control, while executives give themselves a bonus.  The average wage I had heard was £25 per yr.
    The Rich get Richer.
    Your Bill has not gone far enough.

  • http://profile.yahoo.com/WUIYHRR3QZUAMZGM4SOSYNBSI4 Very

    p, li { white-space: pre-wrap; }
    I have been looking through the doc and, as I understand it (and as a small company), it looks great! For many years, whether on the dole, as an employee, self employed or as business owner, I have blamed the UK tax system for reducing work ethics and incentives, keeping people in poverty or the black economy, as a disincentive to saving and making provision for old age and for driving work away overseas.

    In order to get the tax situation to a fair and productive footing, I was willing to take a tax “hit”, but it seems I might not have to my understanding of the doc is correct……

    As a very small company developing products, it looks like it would make running my company from year to year simpler, While for the company (and for myself and my business partner personally) the financial situation would remain fairly similar with no significant change in the amount of tax, changing the emphasis to taxation on earning and distributions would make it easier to plan for the company going forward and with the tax on employment effectively being scrapped, I could think about taking on an employee, something I do not feel comfortable doing with the current setup due to cǎsh flow implications.

    The proposals would certainly make my sons, one on very low wages, happier..It certainly looks like we would all benefit in being able to make proper provision for our pension age – something that is currently almost impossible for people who are in the private sector, who have changed jobs frequently, entered the work place later, may have had periods of self or no employment, and who’s wages have not had a nice upward line on a graph.

    However, can someone explain the implications of the following quote “many of the existing reliefs for national insurance and income tax would have to be maintained within the new combined income tax…” chapter 2, page 51.

  • Neil

    Interesting discussion.  I think the problem with the proposals is that they don’t go far enough.  What we should be aiming for is No taxation.  Taxation is theft.  If we talk about ‘fairer’ taxation, we are simply suggesting that the government should steal a bit less from us.  Even if that happens, it leaves the door open for taxes to be raised again, whether openly or surreptitiously, in the future.  Asking for a fairer tax system is like saying to a rapist ‘OK, you can go ahead and rape me but I’d appreciate it if you could lubricate the back passage before entry’.