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.