In recent years we’ve seen that… 

House prices are up.

Stock market is up.

Pension values are up.

Yet, income taxes are are record highs and all three of these remain either untaxed or very fairly treated. 

But, it gets worse. 

Inflation. Looks like it will be back with a vengeance in the coming months. As we come out of this Covid crisis things start to become short in supply. Housing of course, has been in short supply for a good number of decades.

We are already seeing inflation with building materials, computer chips and here in the UK we are facing a further problem caused by us leaving the EU. 

So there is some of the bad news.

For those of you who have read some of my previous work there are other issues, one is our woeful financial services industry and the level of fraud and….

 My topic of the moment – taxation.

Taxation is probably the most unfair it has been for many hundreds of years.

Income is mainly taxed at source. 

Easy to collect. 

Like VAT it’s taken immediately and passed on to the Government with the hassle passed on to the collector and is therefore paid by everyone, every month or quarterly. 

This means great cash flow for them and obviously means that any Government would be mad to think about slowing that down given that it also has to fund spending. No change will be coming from there. 

But there is a problem.

The UK tax system is not fair at all l in that treatment of income and capital gains are vastly different, depending on how  gains arrive.

Assets are not taxed as fairly as they should.

A couple of examples, let me explain..

Main Residence Taxation – Housing

The last ten years has seen record levels of house price growth. To the point where in 2020/21 we have seen average prices increase by 10% or more. On average houses are £309k each.  At ten percent, that is £30,900 of gains tax free. Every year those prices continue.

Had that income be taxed under pay as you earn then some £6,000 of tax deductions would have been made. 

House Prices – inflation causes these to increase, lack of building and an increasing population force house prices to increase without having to work for that increase. 

If house prices double in the next ten years there will still be no tax to pay on that growth but the same can’t be said for a doubling of your earned income, that will be taxed in full.

If you don’t own a house but work full time then you are effectively subsidising home owners and allowing them a substantial tax break which equals at least your gross pay – per year. 

If you are renting. 

Your landlord also benefits from a tax break on eventual sale of the property he is renting to you in the form of Capital Gains Tax allowances. This tax break effectively means your landlord will qualify for at least a £12,300 tax free amount based on the increase in value of the home that you are funding.  

This applies to every landlord in the country. 

Yet, as someone who rents and contributes handsomely to the system you will find there is little to come back in the way of tax breaks. Only contributions.

Stock Market Increases – partly caused by Government policy have made this with investments substantially better off. 

Quantitative Easing (QE) – Government policy via the Bank of England,  has flooded markets with cheap money and fuelled a stock market boom. Much of that growth will not be taxed as unearned income and will of course benefit those with money, with a pot of cash that is available for investment. 

Perhaps even those who have benefited from ‘furlough’ money and continued to work in part time jobs. Maybe even those self employed workers who have claimed SEISS who have also continued working during the pandemic, have also benefited from both a rising stock market and increasing house prices.

Most certainly those people lucky enough to enjoy a wealthy lifestyle and not reliant on pensions (nearly fully taxed) or those reliant on working for a living (under PAYE) those that rely on investment income pay a lot less tax than those trading their time for money – working. 1

Here is the reality of tax paid in dividends (from investments) comes with a £2000 annual allowance with the balance of the income taxed at just 7.5% for income up to £50,270. Let’s do the calculations on that.

InvestmentEarned
£50,270.00£50,270.00
£2,000.00Less Allowance
£48,270.00
£3,620.25Tax at 7.5%£12,424.24Tax and NI
£44,649.75£37,845.76

Based on the information above it seems that most tax take is from working people, those trading time for money in jobs and is passed on to those relying on house price inflation and dividend income. 

These disadvantages are causing more and more problems as time goes on and are well overdue for reform. 

Tax Search reported in 2020 that the cost of tax breaks and reliefs were set to cost the UK Tax Payer some £155b every year 2 and the actual benefit is little known. 

Governments have gone on for long enough, not modernising, not making changes to the tax code to reflect our changing economics and the global issues. 

No longer are we all working for a living, from week to week, wage to wage.

Our financial futures are made of many different aspects and the situation as it relates to taxation needs to adapt to suit. Which means all taxpayers need to be treated fairly. 

Un earned income needs to be taxed in at least the same way as capital or at the very worst  needs to be treated in the same way as income. 

Where reliefs are introduced or adapted there needs to be careful consideration of the whole picture. The law of unintended consequences.

Please can you let me know  your thoughts on this and advise what changes you would make in order to introduce some fairness back into the system of taxation to benefit all. 

Get in touch using the form below. 

Money and Mindset days cover all of this and more.

Link is below.

Endnotes

1.  https://www.gov.uk/tax-on-dividends

2.  https://www.taxresearch.org.uk/Blog/2020/02/14/tax-expenditures-cost-the-uk-155-billion-a-year-and-in-many-cases-no-one-knows-what-benefit-we-get/