Ms ZiYou Taxes

Only two things in life are certain – as we’ve already covered death this week lets’s talk taxes

Since we’ve already discussed death in what I’d do If I’d be dead in 10 years, I thought it would be time to cover taxes.

Taxes, taxes, taxes.

It seems everyone has an opinion on them. That is to say not many people like paying them. In addition, everyone disagrees on what they are spent on.

Yet most of us agree taxes are beneficial. Moreover, we quite like living in a developed country. We appreciate the security provided by the armed forces, the police and the judicial system. And the infrastructure that allows lets us get from A to B, and provides electricity, water and internet to our homes.

But like most things in life, taxes are not simple. We have a myriad of wealth, income and consumption taxes here in the UK – all aiming to collect money for Her Majesties Revenue and Customs. Or Hector the Tax Inspector if you are of a certain vintage like me.

Around the country, people hold many different views on taxes – some taxes are considered fair and just, others are pilloried and some are open to abuse. We have a conservative government who are keen on law taxes currently, and a Labour opposition who are keen to raise taxes.

Now my personal views are all over the place – I don’t subscribe to any mainstream political viewpoint on taxes.

My libertarian views on Income Tax

So here is the place where I admit that my views on income tax are towards the right side. I fully believe we should pay income tax, but the progressive nature of this tax is what I take issue with. People earning just over £46k are brought into the higher rate of tax (40%) currently, and those earning over £150k pay the additional rate of tax (45%).

So why do I take issue with the progressive nature? Mainly as it is an income tax, taxing money that is earned through effort. And for most of us, the more we work time-wise, the more income we get. And this the more we are taxed. I feel it drives the wrong behaviours and does not encourage people to work more or strive to increase their income, as then the tax burden increases.

In summary, I believe we should all pay income tax but I feel the UK is too progressive at the moment. And this might not be having the desired effect of raising more money for the exchequer, but of encouraging people to work less.

My socialist views on Inheritance Tax

Whereas I am much more left wing on inheritance taxes. As inheritances are unearned income and not as a result of individual effort, I feel inheritances should be taxed more. I would happily support increasing inheritance taxes – and  100% does not sound too extreme to me.

We live in such a divided country with such wealth inequality. By allowing people to pass on their wealth, we are simply perpetuating these inequalities. And yet many people seem aghast at the idea of inheritance taxes. We still have a tribal and feudal system at play in the UK, where people want to ensure their own get a head start.

And that feels deeply uncomfortable to me. I firmly want a society where we have equality of opportunity and who your parents are does not matter.

Indirect Taxes

As well as income, dividend and inheritance taxes, individuals also get hit with many indirect consumption taxes. We often forget about these taxes, and just attribute them to the goods and services we purchase. Examples are VAT at 20%, insurance premium tax, fuel duty, stamp duty and many more.

These taxes are much more difficult to quantify and qualify – some are designed to target luxuries such as VAT. Yet with the tampon tax and the whole court case over whether a Jaffa cake was a biscuit or cake, there is clearly still much controversy here.

My conservative view on pensions and ISAs

The UK also has amazing tax deferment on pensions. These are wrappers designed to fund your post-work life. You can defer paying income tax on up to £40k each year and put that cash in a pension. That can then grow tax-free until your pension access age (currently 55, likely to be 58 when I get there). And then on the way out of the pension many years later you have to pay your income tax.

In my opinion, pensions are great. They benefit both the government and individuals. The high level of tax deferment allows you to save up for your life after work. And the government gets the reassurance that you are planning to support yourself in the future.

ISA’s are a more complex beast to categorise. They are tax-exempt savings schemes where you can invest £20k each year. They are tax exempt for everyone, but only people with cash to save can benefit. And only high earners get the maximum benefit of £20k per tax year. Hence only people in my position are able to max them out and gain the maximum benefit from them.

Nonetheless, they encourage people to save by offering tax incentives to do so.

Simplicity Would be Better

Most of all, the complexity of HMRC’s tax code is mindblowing. Once you get beyond the PAYE system, it is stunning how much complexity and loopholes there are. And this complexity,  no doubt well-intentioned to drive behaviours the government of the day wanted, no longer seems fit for purpose. The complexity allows it to be open for abuse and exploited by people attempting to minimise taxes.

In Summary

To conclude, I believe in taxes. I believe we all need to pay our taxes and contribute to the country we live. Similar to vaccinations, we all need to comply so we can protect those less able to contribute at the moment.

While I personally disagree with the complexity and nature of some of the taxes we have today, I still believe in taxes. And that we should all happily pay our taxes. As Bitches Get Riches points out, they are our annual fee for membership in civilisation.

As the level of poverty in the UK increases due to austerity, as seen in this Guardian article something needs to be done. Are we paying enough tax? Is the government spending tax revenues correctly?

Hence I am pro Universal Basic Income, something I am keen to see trialled more and more in the UK.

Over to you

  • What are your thoughts?
  • How would you describe your position on tax?
  • Do you feel taxes are fair?

Thank you for reading – please leave a comment below and join in the conversation. You can also connect on Twitter or contact me privately.

19 comments on “Only two things in life are certain – as we’ve already covered death this week lets’s talk taxes

  1. I fnd it fascinating how everyone holds such passionate, yet differing, views on taxation!

    What gets missed in the debate is the way taxation is often a device used to apply the social policies run by the government of the day… and to get self interested pork-barrelling politicians campaign donations and votes.

    For what it is worth, my take on taxes in a nutshell is the system should be simple, and folks should have to live with the consequences of their own lifestyle decisions:

    * Benefits should be payable up to the level of “enough”, but no further. Same levels should apply regardless of whether you are poor, disabled, unemployed, or retired.

    * There should be no middle class welfare, beyond the means tested eligibility to the benefits described above.

    * The tax free threshold should be set at this same level of “enough”.

    * All income should be taxed equally. It shouldn’t matter whether it was a wage, dividend, interest, rent or royalty.

    * Capital gains should be taxed at the same tax rate as income.

    * All capital gains (including on owner occupied housing) should be triggered on a change in beneficial ownership of an asset. The exception is co-habiting couples (i.e. married, defacto, civil partnership), when the gain on owner-occupied housing should be due when the surviving spouse dies or sells.

    * Inheritence tax should be removed, as it would be unnecessary. Inherited assets would be incur capital gains tax on the transfer.

    * There should be no tax deductions, rebates, or offsets. People should make their decisions based upon their personal bottom line, the government shouldn’t subsidise loss making businesses or folks who incur more expenses than their income is worth.

    * National Insurance should be abolished, it is just another form of income tax. Combine the two, simplify the system.

    * All businesses should be taxed as businesses. Universities, charitites, political parties, and churches should all pay the same tax rates as other firms. The government already has a social security framework and education budget, it shouldn’t be further subsidising the operations of these entities.

    * Self selecting pensions should be mandatory, but not tax advantaged. After tax money in, income and capital gains tax regimes apply on the way out.

    * ISAs should be removed.

    * Personal and corporations tax rates should be the same. There should be no tax arbitrage opportunity for performing the same work via alternate legal structures.

    * There should be no indirect taxation. Today you could be paying 45% tax on your next £1 of earnings, plus a further 2% National Insurance contribution, then a further 20% should you choose to spend it. On that additional £1 your effective tax rate is over 57% by the time you’ve spent it!

    The tax system should be simple and applied uniformly across the economy. A seven year old should be able to understand and apply it correctly.

  2. So, in summary, you’re in favour of taxes other people have to pay (inheritance tax) and against the ones you do have to pay (progressive income tax) 😉

    I mostly agree with Indeedably, at least in theory. In particular, the separation of NI & income tax is fairly ridiculous. It means income from working is always taxed at a much higher rate than income derived from stuff you own – bank interest, dividends, rents etc. I can derive an income of above the national average wage as a FIREee without paying any income tax. If I do a little part time work at minimum wage, I pay a percentage of my earnings as NI. That seems wrong.

    However, governments have to take a pragmatic view. Inheritance tax is very easy to avoid and it’s really a tax on people who die unexpectedly or haven’t taken steps to avoid it, so while I agree with the principle, in practice it’s not really worth it. Indirect taxes on sales or consumption are really difficult to avoid, so start to look like a good idea (and I think it’s correct that governments use them to account for externalities – you should certainly be taxed more for emitting CO2 by buying fuel or plane tickets, for example.)

    Note also that the marginal tax rate between £100k and £120k (or thereabouts) is actually 62% (40% income tax, 20% due to loss of allowances and 2% NI) – even worse than the 45% + 2% quoted.

    1. Indeed, like everyone else I’m a hypocrite 🤣

      Nonetheless, at the end of the day if we consistently tax earned income more than unearned we are perpetrating the feudal society. And that’s something I really disagree with.

      And I agree it’s all behavioural economics in action.

  3. Britain is a strange place where you are highly taxed for doing things eg working, but lowly – even negatively – taxed for not eg holding onto large amounts of land wealth where all manner of subsidies exist.

    I have mixed feelings about that because a lot of human doings aren’t that good for the planet, or really encouraging human happiness and well being either. Perhaps our tax system should focus on encouraging human beings ie self actualisation and happiness.

    I agree with you on inheritance tax, but suspect that it’ll never happen. In my experience, a surprising number of otherwise socially progressive people are extremely shocked and upset when you challenge their privilege in this way.

    I quite like the idea of VAT as it tackles spending, and done right could encourage frugality, but it often oddly applied (tampon tax is good example). I’d use it to drive more sustainable choices eg higher on plastic goods with a lot of embedded carbon in them due to transportation over long distances, manufacture and poor end of life pathways. I’d potentially give those on very low incomes a way of clawing some of it back from less sustainable essentials.

    Income tax, I’m not sure about as I’ve earned minimum wage some years and over £100K in one memorable one. Salary sacrifice into a pension allows you to escape the worse of it. There are also lots of loopholes eg in micro-renewables generation, renting a room out, eBay, ISA income etc. Currently, it suits it me very well as I’ve managed my affairs around it.

    NI really annoys me as it’s clearly nothing of the sort. If I had my way, it would be channeled into a sovereign wealth fund like mechanism so it has a better chance of doing what it says on the tin rather than being a stealth tax.

    1. Hi greencat, yes that’s my concern as well earned vs unearned income. And even the socialist labour party isn’t exactly advocating to equalize them, so I think we’ve got a long journey to equality here in the UK.

      Yes I can see how taxes can be used to drive the right environmental behaviour, I’m guilty of only really stepping up my canvas bag game when the tax came in.

      Similarity I generally organise things around the tax framework, filling my pension and ISA etc.

      And I agree with the NI, but I have no idea how we get rid of it, as it’s so embedded in the social security systems and benefits and pension eligibility. There is certainly loads of scope to align it to income tax, but then mergIng them is a little more problematic.

  4. I was going to write something meaningful and insightful but upon reading {in·deed·a·bly}’s comment I can only say that I totally agree with what they wrote.

    Life back- find what someone else thinks and agree. Saves time and brain power. 😀

  5. One point that I would like to reiterate is that beyond the tax free allowance, taxes on paid employment are very high – if you include employers and employees NI an income tax.
    Whilst you can earn that same money from dividends and pay much less.
    Tax needs to be paid but it is assumed that the burden should fall on productive people more than assets – it’s not right but won’t change in the UK anytime soon with all attention diverted to Brexit. And the influence of older.asset rich voters.

    1. Yes, that seems to be the main criticism of the tax regime that we can all agree on – that assets are not as heavily taxed as earned income.

      Not to mention that by the time people get to the position to change things, if they have done their time paying high income taxes they aren’t going to then support a sudden move to higher asset taxes.

  6. Tax is something we all have to pay as contribution to society but I do agree that it should be simplified. Is UK tax too high? The only time I ever thought that was when I was in debt. 20%40%/45% is very high though compared to some other countries – imagine if you worked in Hong Kong and paid their 15% tax on your entire six-figure salary! Plus you will get a tax rebate most years as the HK government always has a tax ‘surplus’!

    I am a little concerned about the NI ‘ponzi scheme’, with current NI payments paying current pensioners. What if more young people ‘retire early’ and stop paying NI, who’s going to be funding my state pension, or yours?

    I think in the UK, we are lucky to have the tax deferment on pensions, the new rules of being able to access them in your mid-50s is great and although I have only ever been able to max out my ISA once, I think ISA’s in general benefit most people.

    Inheritance tax? I can see both sides of the argument; people wanting to protect what’s theirs for their offspring versus wealth inequality. If pushed, I would probably be more in favour of the former than the latter – I don’t begrudge anyone who’s had a head start in life, it’s the luck of the draw in life, privilege perhaps.

    1. Hi Weenie – wow, that HK tax rate is tiny! Like so small! Do you have to pay for more things like education and healthcare there?

      Yes, the funding of NI is often likened to a Ponzi scheme – Although in reality is not just a pot of government money coming from the budget? Either way, there are a lot of years before my state pension is due – and I’m pretty sure it will have changed massively by then. Will it still exist? Be means tested? Need more contributions? I don’t think the triple lock will stay, but apart from that I wouldn’t want to make many predictions.

  7. I definitely flip flop between right and left wing when it comes to taxes. The left wing part of me is happy to pay taxes (including PAYE, VAT and Inheritance Tax) as long as it gets spent on the ‘right’ things – and I worry that those things are quite right wing.

    My ideas of the right things are things like spending on preventative medicine over waiting until people fall ill. It’s investing in early years education while keeping the current student loan system (I’m totally with Martin Lewis on the system being a non-onerous graduate tax – not a loan). It’s about putting up taxes on high fat and sugar foods to pay for obesity treatment and prevention. It’s about building council housing while moving people from council homes that are larger than they need. I could go on..

    What that then moves me to is a right wing position on tax to keep it as low as possible so that I can give more to charity to pay for what I think matters!

    1. Thanks for sharing Caveman – and yes I do agree we could do with some preventative medicine in the UK.

      I think most of us in one way or another have some right wing and some left wing positions we hold.

  8. What indeedably said… Though in an ideal world I’d like to keep NI and VAT but the temptation for politicians is too great.

    For NI it would go back to it’s true purpose as insurance. Paying for more generous insurance coverage (long term illness, job loss, disability, maternity/paternity).

    For VAT I’d massively simplify it. Most things would be zero rated. But luxury goods, like jewellery, luxury cars etc. would attract much higher rates. Current VAT is too regressive and complex.

    Neither will happen.

  9. Hey, Ms. ZiYou. Financial masculinist from across the pond here. I’m a freedomist, and I don’t believe one can be free if the political majority has an unlimited right to tax one’s income or wealth. To be free, one has to be able to tell the political majority to lump it at some point. Just where that point rests is difficult to say. The boundary between liberty and serfdom on the taxation front isn’t perfectly clear. For me, however, that boundary is 15 percent. If the combined take of all levels of government is 15 percent or less of my income, I’m cool. I regard anything above 15 percent as tyrannical. And my parsimonious attitude toward taxation isn’t just because I’m a miserable wretch. I loathe taxes largely because government is inept and corrupt. Here in the states, for instance, all levels of government combined spend over a $1 trillion annually on education (K-12 and college). With that kind of money, we Americans should be the most learned and cultured people on earth. And I assure you, we’re not. Yes, government pays for some civilization out of its tax receipts. But it also pays for a lot of plunder and a lot of crony capitalism. And until the government can get a handle on the plunder and the cronyism, I can’t in good conscience accept taxation above 15 percent. Well, that’s my pathetic take. Nice post, Ms. ZiYou. You made a lot of good points. Cheers.

    1. Hi Mr Groovy – lovely to see you here – and your libertarian views are certainly different for the norm in the UK. I suspect you might have a heart attack if you see how much tax we pay!

What do you think?