I am going to make you work to find the answer…sorry! But please bear with me.
In my latest blog I am trying to walk the fine line between presenting the facts and any political bias (albeit from my viewpoint) as I want to highlight 3 taxes you might not be aware of. Before I do, it is worth pausing for a minute to ask…….Why does the government tax us?
The UK government pays for services and benefits such as NHS and Welfare payments via two main sources…. taxation and borrowing. To put things into context in the tax year 2022/23 the government raised £910 Billion via taxation!
There are a variety of different taxes, however the majority of income received by the government is from the following three taxes. In the 2022/23 tax year they raised from Income tax £248 Billion, National Insurance £175 Billion and VAT£157 Billion. Therefore, in the region of two thirds of total taxes raised by the government in the 22/23 tax year were from these three taxes.
Whilst I am sure we all would like to see changes to some of the other taxes, if any thing to make the system simpler to understand they are unlikely to make a significant difference to government revenue. Clearly this doesn’t stop a variety of governments tinkering with them though.
Through taxation the government can distribute wealth and spread any financial pain between people and over a long time period, but it can’t eliminate it altogether (for example from COVID and the introduction furlough scheme). With more pressure on the NHS and an aging population there is likely to be more pressure on the government to raise additional income to pay for these services. Additionally tough choices will need to be made by politicians and the public to decide what services we no longer need or are happy to cut back on (if that is at all possible). When the taxation system is mixed with a variety of politicians (from both the left and right) we are left with some potentially hidden and/or quirky taxes.
The tapering of the personal allowance means someone earning between £100,000 and £125,140 faces an effective 60% tax rate on that portion of their income.
Let’s imagine you earn £120,000 which is £20,000 above £100,000. You would not only pay £8,000 in higher rate tax on the £20,000, but you’d also lose £10,000 of your personal allowance. And with £10,000 of your personal allowance gone, that portion of your income is now also subject to tax at 40%, costing you another £4,000. In other words, of that £20,000, you’d only get to keep £8,000, which equates to a 60% tax rate.
Historically we have seen income tax thresholds increase over the year’s most notably the personal allowance in the 2008/09 was £6,035 and now it stands at £12,570. Jeremy Hunt announced in November 2022 that all Income tax thresholds will remain as they are until 2027/28. In short this means more individuals will be push into a higher tax band increasing the government revenue. For example.
Currently higher rate tax starts at £50,270, meaning anything an individual earns over this they will pay 40% income tax. If an individual has a salary of £50,270 and receives a pay rise of 3% per annum for the next 5 years this means their salary would increase to £58,276 and the additional income would be taxed at 40% rather than 20%.
If an individual’s income is between £50,000 and £60,000, the income tax charge will be 1% of their Child Benefit for every £100 of income between £50,000 and £60,000. If an individual’s income is over £60,000, the charge will be equal to the full amount of the Child Benefit so they will be no better off for receiving the benefit.
Couples can have a combined income of up to £100,000 and not be affected, as long as neither of them has an individual income of over £50,000. For example, if two members of a couple are each earning £45,000, they will not be affected by this income tax charge.
The charge is paid through a self-assessment tax return. It is an individual’s responsibility to make sure that you pay this tax even if you are not contacted by HMRC.
An individual can decide not to receive Child Benefit payments if they do not wish to pay the charge and can change your mind at any time.
If an individual decides they do not want to receive Child Benefit because they do not want to pay the tax charge, they can still make a claim for Child Benefit to protect their entitlement to national insurance credits should you need them. You can say on the form that you do not want to receive payment.
It is worth noting there are no simple solutions and every choice has a tradeoff. For example, you can’t cut taxes and expect everything will be fine (as Liz and Kwasi found out) just like you can’t have an open cheque book for spending as it leads to higher and unsustainable levels of taxation. I believe politicians need to be better at telling the whole truth and the public must realise that the government can’t fund every service or benefit that we would like.
For individuals that are caught out by any of these three taxes there could be a solution…. Pensions. They have a variety of superpowers; however, it is best to give me a call or email to talk more specifically about your situation.
Oh, and the answer to the question…. A Jaffa Cake is a cake and not a biscuit. Whilst the Jaffa Cake is sold in the biscuit aisle in shops back in 1991 the courts agreed with Mcvitie’s that it is a cake. It can’t be snapped in half like a biscuit and will go stale if left out like a cake. Why is this important……It means the Jaffa Cake is not subject to VAT. This demonstrates how complicated the tax system gets when you try and make allowances and concessions for some items or perhaps individuals. You always get unintended consequences. This example helps us to understand in part why the tax system is so complicated.
My figures are taken from the book ‘Follow the Money’ and whilst I am only part way through it, I would recommend the book if you would like to understand more about government income and spending.