101 Tax (Yuk)
Here is a first very simple guide to tax in the UK. Due to the proximity of the next election and the possibility of a new mansion tax, I will explain what that might mean.
However, please note that I am definitely NOT promoting any particular party. Tax is just one issue amongst many.
At the moment, there are three main types of tax. This will possibly increase to four types if Labour win the election. No one enjoys paying tax but probably it is worth understanding the different types so you can have a view about which are essential and which are unfair.
Tax on Earnings
This is tax on anything that you earn, including your salary, capital gains (if you sell something and it makes a profit), interest on your savings.
In some ways it seems a fair tax. The amount you pay goes up depending on how much you earn and most people pay it.
However, it can be unfair because some people manage to avoid it, to cheat the system (which means the rest of us have to pay more, because those people still use the roads, NHS, police, etc.) If you are an employee, then you have no options at all, the tax is removed at source – in other words, your employer kindly (!) removes it from your pay packet before you are given your salary. So, someone who works in a shop will be given their monthly pay minus the income tax. Someone who is self employed has more opportunity to be clever and cheat the system. The nice old builder who says, “Pay me cash, it’ll be cheaper for you,” is possibly not declaring those earnings and therefore not paying tax on them. Wealthy people with clever accountants can also avoid paying by hiding their investments in offshore accounts. The government doesn’t see them and so does not remove tax from the interest.
This is a one-off tax on everything you own at the time you die.
Again, this seems reasonably fair. If Bob works hard his whole life and is a jolly clever chap, why shouldn’t he enjoy a nice amount of cash? However, we might not feel that Bob’s son also deserves to have an easy life just because his Dad was talented, so the government can take a slice of the wealth and use it for the rest of us.
However, it does feel rather a personal tax, especially if you are the person who was related to dear old Bob. Plus, if Bob worked hard and wants to leave a valuable painting to his son, is it fair that the son has to sell it just so he can pay the inheritance tax? Should people be allowed to keep heirlooms within their family or should they be sold to pay tax? There is also the point that it does not seem to actually generate much cash for society. It certainly used to be the case that the admin costs involved in collecting inheritance tax were pretty much equal to the amount of tax collected. So actually, no one benefits. It is interesting that UKIP plan to abolish this tax if they come to power.
This is a tax on everything that you buy. It includes VAT (currently 17½%) and stamp duty (tax when you buy a house.)
This seems quite a good tax. Everyone pays (apart from a few dodgy builders who tell you there is no VAT if you pay cash) and no one can cheat. It is easy to collect and everyone pays.
The unfairness comes in when you consider that everyone pays the same amount. So the poor old lady and Bob the millionaire, both pay the same amount of VAT when they buy a washing machine.
So, there we have the three main types of tax that are currently in use. The are a pain to pay but are mostly fair. We all hate paying them but we all know that if we want roads, police, schools, health service, etc, the money has to come from somewhere. Now we come to the new tax that Labour are proposing:
This is a tax on an asset, something you already own. The proposal is that every year, if you own a house above a certain value, you will have to pay an extra tax on it. You will still pay the normal taxes when you buy it and when you sell it, this is a tax for just owning it.
Firstly, this will probably be popular. It will initially only affect very rich people (who we are all a bit jealous of) and most of us will only benefit from the extra revenue.
However, is it fair? It only targets one type of asset:houses. You can be wealthy and own other things, like jewelry, paintings, land, even pensions (I’ll come back to that one) and you will not have to pay the tax. There are other assets which cannot possibly be taxed, like being beautiful or healthy or living in a fantastic location and unless they generate income, you will not be taxed on them.
Let’s come back to pensions. (If you haven’t read my article on pensions, read it now.) Now, government workers all receive defined benefit pensions. This is a HUGE asset. When they start to receive the pension they will pay income tax, just like when someone sells their mansion they will pay tax, but in the meantime it is a highly valuable asset which they own. Just like a house. Strangely, no politicians are suggesting that anyone should be taxed just for owning this hugely valuable asset of a valuable pension. Even though some other people (those not on defined benefits pensions) have invested in their home, expecting that when they are older they will sell it and use the money as part of their pension.
The new tax will cause house prices to be distorted (because who will want to buy a house that is just inside the amount where they have to start paying the tax? Remember, it is every year, not when the house is purchased.)
It is also unfair. No one is suggesting that other assets should be taxed, that if you own a valuable painting you should have to pay tax every year while you own it. Sometimes, things that are unfair are worth fighting against, even if we are not affected.
Once the new tax has been introduced, it will not be difficult for governments to lower the threshold when they do the budget. At the moment, the house price they are suggesting is huge, way above what most of us could afford. However, what will stop that from creeping downwards? How long before most people in senior positions, our doctors, head teachers, managers, who have worked hard and invested their savings in a house, will start to lose those savings? It is called a ‘mansion tax’ but if someone lives in London it might actually be an ‘apartment’ tax.
We do not know if there will be a cap on the tax or if someone who lives for many years in these houses could eventually end up owing more than the house is actually worth.
Personally, I am very unlikely to ever be able to afford a house that will be charged the mansion tax. However, I do not like the thought that a tax could be introduced which is blatantly unfair. It is just not very British……