Tax by design

The director of the Institute for Fiscal Studies (IFS) has bitterly criticised the structure of the UK tax system.

In May the director of the IFS, Paul Johnson, gave the annual Chartered Tax Adviser address.  The essence of what he said grabbed a few press headlines in the national press but was deserving of more coverage.

Mr Johnson highlighted the “complexity and uncertainty” created by the poor tax policies introduced by the current coalition government “as well as those of its predecessor (and often earlier governments too)”.  Among his criticisms were:

  • The existence of a 60% income tax band, which is created by the tapering away of the personal allowance once income exceeds £100,000.  This band is now £20,000 wide, after which the marginal rate drops down to 40% for the next £30,000, before rising to 45%.  As Mr Johnson said “It’s hard to make much sense of that.”
  • A trend “which has fundamentally altered the nature of our system of income tax, namely a continued increase in the number of higher rate taxpayers.”  Mr Johnson noted that, “Numbers have risen from less than 2 million in 1990 to nearly 4 million in 2007 and well over 5 million by 2015”, and that the change “has never been announced or properly debated.”
  • The structure of Stamp Duty Land Tax (SDLT), which Mr Johnson said was “one of the worst designed and most damaging of all taxes.”  At the extreme, a £1 increase in the sale price of a home can now trigger an additional £40,000 SDLT bill.
  • Sharp increases in income tax personal allowances have not been matched by the threshold for National Insurance Contributions (NICs), a tax on income in all but name.  In contract to the politician’s emphasis on the numbers removed from income tax, Mr Johnson remarked that there were now over one million low paid workers who pay NICs, but no income tax.

A former US Treasury Secretary said that a tax system should like “like someone designed it on purpose.”  There appears little chance of that happening in the UK soon, whatever the outcome of the General Election in less than a year’s time.

Tax laws can change.  The Financial Conduct Authority does not regulate tax advice.

6th June 2014