Pictured above: Andrew Shaw, Begbies Traynor
Group
Andrew Shaw, national tax managing partner for BTG Tax, part of
the Begbies Traynor Group with offices in the Midlands, analyses
the "crazy" ways in which the Government relieves you of your
hard-earned cash.
When I first started in tax, we were still dealing with the
Labour Government of the late 1970s with income tax at 83 per cent
on earned income, and a further 15 per cent surcharge on investment
income, 98 per cent in total.
Many clients chose to go into business renting trailers for
articulated lorries.
Yes, really.
The idea was that you bought the trailer and in the first year
claimed an allowance of 100 per cent of the cost - you had no
income as it was bought on the last day of the year. The loss was
carried back and you recovered tax at 98p in the pound. HM Revenue
& Customs paid you interest as well, so you ended up with about
107p for every 100p lost.
The client therefore had no worries about how much rental income
he or she might receive on the trailer.
Unfortunately the man running the rental business only had one
trailer; he just sold it several hundred times.
Thirty years later we now have a top rate of tax in excess of
100 per cent - raise your income but take home less.
Imagine you earn £160,000 a year and pay £50,000
into your pension scheme. Your company then gives you a
£10,000 rise, on which you pay £5,000 in Income Tax and
National Insurance of £150, leaving you with a net increase
of £4,850. However, your pension contribution will now only
get 30 per cent tax relief instead of 40 per cent, so this costs
you £5,000 (£50,000 x [40% - 30%] = £5,000).
Therefore you are £150 worse off than before you had the pay
rise - a marginal rate of 101.5 per cent.
It's nonsense, complete and utter rubbish.
Who thinks up such a crazy tax system?
There has been a furore in professional circles about the
stupidity of the proposals and how the forestalling provisions
worked. Although the Budget announced the changes as only applying
from 2010, in practice for many taxpayers, including myself, the
effective date, now long past, was April 22.
For those that were not alert enough to pay their annual pension
contribution between April 6 and April 21 the new rules were
effectively retrospective.
There has been much lobbying over the changes but most of it was
ignored by Parliament and the Finance Bill was largely enacted as
announced, except the de minimus limit for the forestalling
measures rose from £20,000 per annum to £30,000.
Where it is still wrong or patently unfair, then hopefully there
will be further changes in the years to come.
Good legislation creates certainty as to how income or capital
is taxed and works so that changes are small and gradual. In that
way taxpayers can act responsibly and respond to Government
plans.
The Government encourages taxpayers to save into pension plans
with generous tax allowances. The taxpayer does not then expect the
Government to complete a volte-face and punish them for acting in
accordance with Government wishes. The
Government either wants people to save for their retirement or
they do not. People are making long term decisions and they need
certainty that the tax rules will remain constant.
On another note, Capital Gains Tax was 40 per cent (or 10 per
cent with taper relief on business assets) and it is now 18 per
cent, with income tax rising to 50 per cent next year.
Any significant discrepancy between the levels of tax on income
and capital will lead to distortions in the investment market and
taxpayers choosing to invest in ways that minimises their tax
exposure. So how long will the 18 per cent CGT rate last? My guess
is about 12 months.
Tax revenues will continue to fall as earned income and
investment income gets hit by the recession and the Bank of
England's decision to reduce interest rates to nominal levels.
In these circumstances the Government will have to raise tax
rates just to keep the revenues flowing.