Is our Income Tax (and reliefs) system fit for purpose ?

[kingcole]

WOW - Not even the replacement of salary with dividends ? Very commendable. I salute you then Sir

I do take dividends instead of some salary. It's hardly a releif.

Firstly, my company will have paid 20% corporation tax and then from what's left, if I take as a dividend I will be paying a further 32.5% personal taxation as part of the new dividend tax. That's equivalent of 52.5% tax, is in not?

Many convieniently forgot that dividends carry tax and the company has already paid tax. Yes, there is no NI on them. Whoopee.

 

[larus]

I do take dividends instead of some salary. It's hardly a releif.

Firstly, my company will have paid 20% corporation tax and then from what's left, if I take as a dividend I will be paying a further 32.5% personal taxation as part of the new dividend tax. That's equivalent of 52.5% tax, is in not?

Many convieniently forgot that dividends carry tax and the company has already paid tax. Yes, there is no NI on them. Whoopee.

Actually, you're wrong - it's not 52.5%

See example.

If you pay yourself a salary of £8,000 per year, and draw down a further £60,000 in dividends, you first use up your £10,600 tax-free personal allowance when calculating your overall tax liability.

You pay no dividend tax at all on the dividends you receive within the ‘basic’ tax band – i.e. on the first £31,785 (2015/16) after taking into account the personal allowance.

So, there is no additional income tax to pay below £42,385.

You are taxed on the gross dividend amount (10/9 times the £60,000 dividend) = £66,667.

You must pay higher rate dividend tax on the income you have received between £42,385 and £74,667 (£32,282) – this is 22.5% of the gross dividend amount (32.5% higher tax rate – 10% tax credit) = £7263.45

 

[NooBHA]

this isnt true. for a start, the poorest arent paying income tax at all. secondly Brown was responsible for all manner of tax reliefs avilable to middle-high income earners, and more than doubled the amount of tax legislation.
get the politics out of the way, do we want tax to pay for public services or to punish those that have been succesfful in careers? if we assume the former, the politics should be about how much we spend on the services and what they are, then use a simple tax system, adjusted a few % either way to pay for it.

I am sure if you look at simple Whillans Tax Tables with Tax Bands and thresholds and Allowances during the years that Gordon Brown was Chancellor you would see that there were no where as many different rates and thresholds to consider as there are now.

 

[NooBHA]

I do take dividends instead of some salary. It's hardly a releif.

Firstly, my company will have paid 20% corporation tax and then from what's left, if I take as a dividend I will be paying a further 32.5% personal taxation as part of the new dividend tax. That's equivalent of 52.5% tax, is in not?

Many convieniently forgot that dividends carry tax and the company has already paid tax. Yes, there is no NI on them. Whoopee.

When you take into account both the Employers and Employees NI then the tax saving within the Basic Rate band hits the thousands - Even the new rules in 2016/17 there is still substantial savings to be had.

I speak often with some Grade 6 and grade 7 HMRC Inspectors on this and they get so frustrated that consecutive Governments fail to close this loophole completely. They fully understand why in that Government wants to promote small business' and they want to give incentives to people to set up in business but it gets exploited year after year.

 

[kingcole]

Actually, you're wrong - it's not 52.5%

See example.

If you pay yourself a salary of £8,000 per year, and draw down a further £60,000 in dividends, you first use up your £10,600 tax-free personal allowance when calculating your overall tax liability.

You pay no dividend tax at all on the dividends you receive within the ‘basic’ tax band – i.e. on the first £31,785 (2015/16) after taking into account the personal allowance.

So, there is no additional income tax to pay below £42,385.

You are taxed on the gross dividend amount (10/9 times the £60,000 dividend) = £66,667.

You must pay higher rate dividend tax on the income you have received between £42,385 and £74,667 (£32,282) – this is 22.5% of the gross dividend amount (32.5% higher tax rate – 10% tax credit) = £7263.45

You are quoting the rules for the previous tax year. In April of this year a new dividend tax was introduced. Before there was effectively no extra tax to pay for basic rate tax payers as they was a 10% tax and then a tax credit was issued cancelling it out.

For clarity, the first £5000 of dividends are free of tax (but the £5000 still contributes to your total taxable income), then lower rate bods pay an extra 7.5% with higher rate bods paying the 32.5% quoted.

 

[kingcole]

When you take into account both the Employers and Employees NI then the tax saving within the Basic Rate band hits the thousands - Even the new rules in 2016/17 there is still substantial savings to be had.

I speak often with some Grade 6 and grade 7 HMRC Inspectors on this and they get so frustrated that consecutive Governments fail to close this loophole completely. They fully understand why in that Government wants to promote small business' and they want to give incentives to people to set up in business but it gets exploited year after year.

There is a small saving to be had, but, with the new rules, that saving is rapidly eroded once the individual hits higher rate tax.

It's not as much as you think it might be.

Say you earn £40,000 on a regular PAYE salary. You will pay £3840 in NI and £5880 in tax leaving you with £30280.

If you had a company that made £40,000 profit. You could pay yourself a salary of £8000 which would be free of NI and TAX. The companies profits would reduced to £32,000 of which they will pay £6400 corporation tax. The remaining £25,600 could be distributed as a dividend.

Of this £25,600 the first £5000 will be free of tax with 7.5% (£1545) payable on the balance.

In this scenario the individual will be left with £32955. A premium of £2675 over the employed person on PAYE.

The question here is how much do you reward the person who has taken the risk of setting up and running a company? Remember, they have no holiday pay, no minimum wage, no redundancy pay if the company folds.

There simpy has to be an incentive for people to run businesses otherwise no one will!

 

[NooBHA]

There is a small saving to be had, but, with the new rules, that saving is rapidly eroded once the individual hits higher rate tax.

It's not as much as you think it might be.Say you earn £40,000 on a regular PAYE salary. You will pay £3840 in NI and £5880 in tax leaving you with £30280.

If you had a company that made £40,000 profit. You could pay yourself a salary of £8000 which would be free of NI and TAX. The companies profits would reduced to £32,000 of which they will pay £6400 corporation tax. The remaining £25,600 could be distributed as a dividend.

Of this £25,600 the first £5000 will be free of tax with 7.5% (£1545) payable on the balance.

In this scenario the individual will be left with £32955. A premium of £2675 over the employed person on PAYE.

The question here is how much do you reward the person who has taken the risk of setting up and running a company? Remember, they have no holiday pay, no minimum wage, no redundancy pay if the company folds.

There simpy has to be an incentive for people to run businesses otherwise no one will!

Trust me , I know exactly how much it is right down to the very last penny

 

[kingcole]

Trust me , I know exactly how much it is right down to the very last penny

If I've made an error in my figures, let me know. I'm not an accountant and I'm not pretending I can't make an error.

But a comment like the one you just made does not really add to the arguement and does nothing to colaborate whichever point you are trying to make.

 

[NooBHA]

If I've made an error in my figures, let me know

. I'm not an accountant and I'm not pretending I can't make an error.

But a comment like the one you just made does not really add to the arguement and does nothing to colaborate whichever point you are trying to make.

My Charge Out Rate is £340 per hour. First you need to pass Money Laundering Regulations and the tell me where to invoice you. The clock is ticking as we speak

 

[Biscuit Barrel]

The more you earn the MORE you pay, EVERY single persons tax is deducted at source through PAYE and anyone earning over £100k a year should pay at least 60% tax going up by 10% for every £100k earnt till anyone earning more than £500k a year pays 90% tax.
No tax fiddles and EVERYONES salary disclosed publicly every year and the amount of tax paid shown so we know just who is NOT saying their fair share.

This type of policy was tried 40 years ago. Complete and utter shambles.

 

[Raleigh Chopper]

Have you seen the alternative!?

You said that you are a true blue which means you would never sully yourself to vote for anyone else, and by saying have you seen the alternative you are actually sticking up for them just like so many other blue goons on here.
If you vote conservative then take what's dished out and stop croaking on about it.

 

[kingcole]

My Charge Out Rate is £340 per hour. First you need to pass Money Laundering Regulations and the tell me where to invoice you. The clock is ticking as we speak

What a complete bellend. I'm not looking for advice. I'm mearly quoting figures that are made available in the public domain.

If your rate is £340ph to confirm or deny such figures then I'm simply lost for words.

You started by making a valid contribution to this thread. You make an odd comment saying you know to the penny what it is, implying what I wrote is not accurate. When I asked what I got wrong you come out with this nonsense.

 

[kingcole]

You said that you are a true blue which means you would never sully yourself to vote for anyone else, and by saying have you seen the alternative you are actually sticking up for them just like so many other blue goons on here.
If you vote conservative then take what's dished out and stop croaking on about it.

I'm just a realist but at the same time I note that no government is perfect. In this day and age of such an ineffective opposition its only correct that traditional Tory voters question them.

But 'true blue' may not accurately describe me. I did vote for Blair and regretted almost immediately. Ironically, a lot of the complexities I mention were brought in by Gordon Brown!

 

[Raleigh Chopper]

I'm just a realist but at the same time I note that no government is perfect. In this day and age of such an ineffective opposition its only correct that traditional Tory voters question them.

But 'true blue' may not accurately describe me. I did vote for Blair and regretted almost immediately. Ironically, a lot of the complexities I mention were brought in by Gordon Brown!

That's why I am very comfortable posting political outbursts because I detest them all and can clearly see right through all of them.
In fact if you are talking about tax then go further into tax after you have had your income tax and NI removed. It's enough to make you cry, so the answer to your question is yes, it's totally unfair, the whole tax system is rotten from top to bottom and we are miles below many other countries who have a far better life than we do, we do not get value for money for our tax pounds, very far from it. No wonder so many people avoid paying tax I don't agree with it but you cannot blame them.

 

[NooBHA]

What a complete bellend. I'm not looking for advice. I'm mearly quoting figures that are made available in the public domain.

If your rate is £340ph to confirm or deny such figures then I'm simply lost for words.

You started by making a valid contribution to this thread. You make an odd comment saying you know to the penny what it is, implying what I wrote is not accurate. When I asked what I got wrong you come out with this nonsense.

It was a joke mate

 

[BN9 BHA]

I'm pleased to see the tag at the bottom of the page.......

 

[vegster]

We are entering in to a proper 2 speed economy surprisingly quickly..... currently there is still a plethora of low paid,close to minimum wage jobs plus plenty of gig economy zero hour contract jobs. Amazon are already trialling a self service supermarket model where there are no checkouts and everything is put on your Prime account as you shop. This will lead to a huge reduction in staff in supermarkets as the big 5 supermarkets will have to go to this system too to be competitive. Driverless cars are on the way quickly too, so, ergo,driverless delivery trucks and vans plus taxi's and probably buses. This will hugely reduce the number of jobs that exist in the low pay sector leading to a huge disparity between the Have's and Have Not's.

Tinkering with the tax system is just re-arranging the deckchairs on the Titanic.

 

[drew]

There simpy has to be an incentive for people to run businesses otherwise no one will!

Isn't it obvious! If you run your company and it becomes successful, you can earn more than the £40 shown in your example (subject to tax). If your company makes £80k profit then you getting considerably more than the chap (or the lady) stuck on the salary.

As for holiday pay, surely that would be included in your earnings. There are plenty of people running their own business who take several holidays a year and I don't see it troubling them.

 

[happypig]

I don't understand all this tax mullarkey; I have been PAYE for 37 years.
What's clear to me though is that there seem to be myriad ways for people with a lot of money to avoid paying tax (I myself am putting £6k/year into AVCs to boost my pension a bit).
I think what would make it better would be for each individual to have an amount (either per year or lifetime) that they can offset against tax so that you can put money into ISAs or AVCs or pay yourself dividends but the overall tax saving is capped. Of course there will always be people at the lower end of the economic spectrum that cannot afford to use these measures but they shouldn't have to pay more tax so that millionaires can squirrel some of thier cash away.

 

[warmleyseagull]

The tax system is absurdly complex throughout - the problem is that there is little political capital in simplifying the system, but useful headlines in introducing something new that adds further complexity - 3% stamp duty surcharge on second homes for example sounds like a good idea but it will be absurdly complex to manage.

The Office for Tax Simplification has lobbied for a long time to unify NIC and IT. It would make a lot of sense as £1 deducted for NIC looks pretty much the same as £1 deducted for IT and the 30% rate that OP mentions for basic rate has been mooted. Problem is that no government wants to be tarred with the brush that they increased income tax, however disingenuous that might be if they simultaneously scrapped NIC. The fact that the rates change at different levels to IT just adds further to the absurd complexity.

As regards pensions, there has again been discussion around a unified single rate of deduction. It might happen but there is more logic to higher rate taxpayers getting more tax relief on contributions than OP gives credit for as they may well be paying a higher rate on the subsequent pension when it is taken. The £1m lifetime contribution limit is also a factor in this equation.

I believe a lot of complexity and silly advantage taking by the uber rich could be avoided if Chancellors could avoid the temptation to introduce juicy sounding investment reliefs. There has rightly been a lot of criticism over the likes of Sir Alex benefitting from a tax relief for film production that was abused; no problem with HMRC taking a hard line, but why was the releif ever introduced? Is our film industry so precious that we have to bring in an investment relief that immediately gets abused by get rich quick types who spot a way to get round it? EIS, VC relief and the like should all go - there is no evidence that they stimulate angel investment that wouldnt happen without them.