Turning a crazy world to your financial advantage…
PUBLISHED: 09:26 18 August 2016 | UPDATED: 09:26 18 August 2016
Nick Latimer, director in the national audit, tax and advisory Cheltenham office of Crowe Clark whitehill asks: is it time to take our tax system apart and start again?
This year will go down as the year of surprises, when we had to rethink many accepted facts of life: membership of the European Union, that we would only ever see one UK Wimbledon champion every generation or so…and whatever else the coming weeks hold.
We live in a topsy-turvy world, so this could be considered a good time to talk about the craziness of the UK tax system and look at the peaks and troughs of UK tax rates. Firstly, we can’t blame Europe for all the complexities of our tax system. Crowe Clark Whitehill has long argued for tax simplification: this is within the power of national government and Philip Hammond could make his mark as Chancellor and strike a blow for transparency and fairness in tax that would echo for years. Few would deny a radical overhaul of our increasingly complex tax system is long overdue. Let’s quickly run through the rollercoaster of marginal income tax rates for employed earners Philip Hammond has inherited.
Deep breath…… here goes: 12% employee National Insurance Contributions starting at £8,060, up to 32% with basic rate income tax from £11,000, increasing to 42% with higher rate tax from £43,000, then to 60% from £50,000 for those with two children as child benefit is withdrawn, back down to 42% over £60,000 before jumping back up to 62% as the personal allowance is gradually withdrawn from £100,000, then back down to 42% over £122,000 before increasing to 47% with additional rate tax from £150,000, and then up again for excess pension contributions penalised as the annual allowance is reduced from £40,000 to £10,000 for those with income between £150,000 to £210,000.
Still with me?
Consider that a married couple with two children and one spouse earning £100,000 could potentially pay up to 20% less tax by starting up a company together earning exactly the same amount. Currently we have a tax system that the public doesn’t understand and the media struggles to explain. The distinction between tax avoidance and evasion is blurry, adding uncertainty to legitimate tax planning (demonstrated by the reaction to a gift received by David Cameron from his mother).
Since 2011, according to The Office for Budget Responsibility, there have been 635 changes to tax legislation. Since March 2015, the UK has had four Budget or Autumn Statements. Taxes have been frozen, cut and introduced. This year we learned that three million individuals had paid the wrong amount of tax because HMRC’s digital roll out did not go to plan. It’s ironic that an organisation called the Office for Tax Simplification (OTS) took nearly five pages of legislation to lay out its role, and progress since its creation in 2010 has been slow. The OTS should be encouraging the Treasury to create a modern tax system to help businesses innovate and grow, and the individuals who work within them pay their tax quickly, easily and on time.
The focus on making Britain great outside of Europe is a one-off opportunity to produce a competitive tax system that is fair, transparent and user-friendly, which could enhance the UK’s reputation both in the domestic and the international business marketplace. Complexity is the enemy of innovation and enterprise. We need a tax system, which is clear and certain. We don’t have to like the rules, just to understood how tax works and what is expected of us. By reducing complaints, the savings for individuals, business and HMRC, in money and time, would be considerable.
There will always be opportunities for planning how and when you pay your tax, and (within permitted rules) how much and by whom. Nick Latimer, director in the Cheltenham office of national audit, tax and advisory Crowe Clark Whitehill, is a private client tax specialist who advises entrepreneurs, wealthy families and those exiting their businesses on appropriate ways to structure their affairs to make the most of tax allowances and reliefs. He has particular specialisms in income tax planning, Capital Gains Tax planning, partnerships, Inheritance Tax, and trusts, as well as advising individuals who are not domiciled in the UK.
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