Taxation is the revenue that the government collects in order to deliver public services such as health, education, welfare and defence, etc. In the UK these revenues come from Income Tax, National Insurance Contributions, Value Added Tax, Council Tax, Corporation Tax, Fuel Duty, Business Rates, etc.
Income Tax: This is the biggest single component of UK taxation receipts, it accounts for about 30% of the total. Income tax started late 18th century and was rated at 1-10% of income. Currently it is levied according to income as follows:
|
Rate |
Rate |
Income Band |
||
| Lower rate | 0% | £0 – £7,475 | ||
| Basic rate | 20% | £7,475 – 35,000 | ||
| Higher rate | 40% | over £35,000 | ||
| Additional rate | 50% | over £150,000 |
On the face of it, the above rates seem to be fair, i.e., the more an individual earns the more tax is paid (both in relative and absolute terms). However, the reality is different with a much heavier burden on the low and mid incomes than on higher incomes. Here are a few reasons for this:
National Insurance Contributions (NIC): This tax started in the early part of the 20th century. It is now the 2nd biggest component in UK tax receipts accounting for almost 20% of all receipts. However, it is a tax on earned income and not on income from investments. As many high-earners in big corporations are able to ‘massage’ their pay package, they shift a big portion of their pay to non-NI-able income, such as taking pay in the form of dividends, shares or pension contributions. In this way they manage to escape paying NICs and reduce their overall tax liability. It is also worth bearing in mind that while the average NIC rate is something like 10-12% of gross income, it is only 2% on pay higher than £3540 per month. This is clearly a tax advantage for the highly paid.
Expenses: When expenses are incurred in the line of work, they would of course be reimbursed without any taxation implications. The trouble is that there is now a prevailing culture of claiming for items that fall well outside what is a legitimate expense. There have been many cases of expenses’ abuse such as the MPs expenses, and that of the National Policing Improvement Agency. This agency issued credit cards to 150 of its staff, only for them to spend up to £6.5m from 2008 to 2010, averaging £20,000 per person per year, spending on such items as lawnmowers and karaoke equipment. This abuse goes on a much wider and deeper scale. Large corporations have no hesitation in helping their top executives to expensive holidays, cruises, flights, etc and claiming them as expenses. Expenses’ abuse is yet another ‘privilege’ used by the wealthy and powerful to augment their income without incurring tax liabilities, something which is not available to the average worker.
More reading: http://www.dailymail.co.uk/news/article-2023578/Police-quango-expenses-Fury-6-5m-lingerie-beehives-away-days-expense.html
Dividends and shares: As mentioned, the wealthy employees shift a big chunk of their pay package into dividends and shares (in some cases this amounts to almost 50% of their total pay package). This way they manage to avoid paying NICs. Bear also in mind that as far as shares are concerned, they normally get offered them at preferential rates and end up selling them when the price is right making handsome profits. Again these profits are not subject to NIC.
Non Domicile (non-dom) status: Essentially, non-domiciled individuals, or ‘non-doms,’ are resident in the UK but have strong affiliations with another country and have an intention to leave the UK at some time in the future. There are an estimated 120,000 registered non-doms in the UK. A non-domiciled person could keep their overseas income and capital gain out of the UK tax net merely by not bringing such income and gains into the UK and paying a modest charge. For example, if someone has, say, £500,000 income overseas, he will be liable to 50% tax on that income, which would be £250,000. To keep this overseas income out of the UK tax net, he only needs to pay a charge of £30,000! This status has been habitually abused by many high-flying businessmen. Two examples spring to mind, one of Ron Sandler, the boss (until 31/12/11) of Northern Rock Bank (a nationalized bank) and the other is the MP for Richmond Park, Zac Goldsmith. How is it that they can hold (or offered) such senior public offices and yet from a taxation point of view they are classified as non-dom?
More reading: http://en.wikipedia.org/wiki/Ron_Sandler
& http://www.guardian.co.uk/politics/2009/nov/29/zac-goldsmith-non-dom-status
Pensions: Pension contributions are not only exempt from tax, but actually help reduce overall tax liability. Top executives at large corporations are being offered very generous pensions packages, thereby maximising their overall pay package and at the same time minimising their tax liabilities. Do you remember Fred Goodwin the previous boss of RBS bank? The man behind the bank’s collapse, he still walked away with an annual pension of £693,000. Do not forget that it was the tax payer who bailed out his failed bank to the tune of billions.
More reading: http://www.telegraph.co.uk/finance/financialcrisis/4840576/Sir-Fred-Goodwin-refuses-to-give-up-693000-RBS-pension.html
Council Tax: Somehow, this tax does not get a mention when people discuss taxation and yet it can seriously add to the total burden. This property tax is yet another one that is skewed in favour of the rich (because it is capped at band H). For example, a typical average family may have an income of £50,000 per annum and may be living in a house worth perhaps £300,000. Their council tax would probably be in the region of £2000 per annum. In other words it adds another 4% on top of central government tax. However, if someone earns say £300,000 per annum and lives in a property worth over £1m, his council tax will probably be just over £3000 per annum, i.e. Just 1% of his income.
You can from above see that most taxes seem to have a cap (income tax, NIC, Council tax) that favours the rich. Additionally, with clever manipulation of pay, the wealthy can substantially reduce their overall tax liability. We end up in a situation where the low paid are certainly paying a much greater portion of their income in tax than the higher paid. The disparity is perhaps best exemplified by this: Mr. Warren Buffett (one of the richest men in the world) said that he was taxed at 17.4 per cent on the $46 million he made in a year, without actually trying to avoid paying higher taxes, while his secretary, who earned $60,000, was taxed at 35.8 per cent.
More reading: http://abcnews.go.com/blogs/business/2012/01/warren-buffett-and-his-secretary-talk-taxes/
While Mr. Buffett is being honest; we know that the majority of the wealthy certainly try harder than him to reduce their tax exposure, not only exploiting tax loopholes, but quite often resorting to schemes bordering on the illegal. They set up off-shore bank accounts and use expensive tax advisors to help them create a complex tax web, so that it is hard for tax authorities to untangle and bring about a successful prosecution.
The tax evasion tactics used by the rich are further adding to the already increasing pay gap between the low and high paid. Such disparity in pay has not been seen since Victorian times. While the rich are more than ever enjoying the trappings of their lavish lifestyle, the average worker is made to work harder than ever to make ends meet. The government, despite its promises of reform has proved that it is impotent in the face of big business. This is best typified by the fact that bankers paid themselves a bumper £4.2bn in bonuses last Christmas ignoring repeated government warnings. This is despite the fact that many of the banks were bailed out with tax-payer money. But perhaps we should not be too surprised for it seems that the government and the rich are in cahoots. Just follow the case of ex PM Tony Blair making millions and paying just a tiny fraction in tax.
More reading: http://www.telegraph.co.uk/news/politics/tony-blair/8999890/Tony-Blair-and-the-8million-tax-mystery.html
Clearly our democracy is being undermined by arrogant bankers and other fat-cats and unless decisive measures are taken to remedy the situation, we may be sleep walking into an ugly state of affairs.