It seems to us that, in the last two to three years, we’ve reached a tipping point in the tax system. 20 years ago, it was a bit complicated. 10 years ago, it was a bit more complicated. Now, however, it’s complicated to the point of absurdity.
Not too long ago, things were fairly simple. If you take the tax and National Insurance rates applying to a Self Employed person, with no other income, they were:
- 0% on the first bit
- 29% on the next bit
- 42% on everything after that
Perhaps the first real point where everything started to wobble was in 2010, when rules came in restricting the availability of the tax-free personal allowance to people earning over £100,000. It meant that the rates would have become:
- 0% on the first bit
- 29% on the next bit
- 42% on the bit after that
- 62% on the bit after that
- Then BACK DOWN to 42% for everything after that
But we also had the introduction of the additional rate in 2010. That made the rates:
- 0% on the first bit
- 29% on the next bit
- 42% on the bit after that
- 62% on the bit after that
- 42% on the bit after that
- Then 47% on everything after that
Then we had the introduction of the clawback of Child Benefit for those earning more than £50,000. If our sole trader has two children, that makes the rates:
- 0% on the first bit
- 29% on the next bit
- 42% on the bit after that
- 60% on the bit after that
- Back down to 42% on the bit after that
- 62% on the bit after that
- 42% on the bit after that
- Then 47% on everything after that
At least up to that point, the National Insurance bands and tax bands changed at the same point. For our clients in Scotland, that changes from April. The Scottish Parliament are allowed to change the higher-rate tax threshold so it’s different from that elsewhere in the UK, and they have chosen to do so by keeping it the same and not increasing it, but they can’t do anything about the National Insurance threshold, which increases whether they like it or not. So, for a Self Employed person in Scotland, with two children, the rates become:
- 0% on the first bit
- 29% on the next bit
- 49% on the bit after that
- 42% on the bit after that
- 60% on the bit after that
- Back down to 42% on the bit after that
- 62% on the bit after that
- 42% on the bit after that
- Then 47% on everything after that
Only a few years ago, there were three bands. Now there are nine in that list above – and it’s not remotely an exhaustive list, and there’s nothing obscure or niche informing it, it's all basic mainstream stuff. We’ve not taken into account tax credits and other income-related state benefits, which would add further bands in and make the list even longer. We’ve also not taken into account new tax rates on savings – where, from this year, an extra £1 in interest income can genuinely lead to an effective 20,000% tax rate. Or the new tax rates on dividends. Or the new tax rules for people with rental profits. Each of which would add in multiple changes in rate in our list.
It’s obvious that a system that complicated and scattershot can’t possibly achieve its goals, whatever they might be. We’ve a kind of “sticking plaster” culture in our politics now, it seems, where nobody will ever reverse anything that isn’t desirable, as they can be attacked for having made a mistake. Instead we add more and more things, in the pretence that it’ll fix everything.
As accountants, perhaps we ought to be jubilant Our job isn’t just to deal with those bands, it’s also to deal with the interaction of those bands with corporation tax, VAT, inheritance tax, stamp duty – all of which have been similarly sticking plastered into a place of total insanity – in light of people’s businesses, their personal finances, their aspirations and their personalities. So things are exponentially more complicated than they were some years ago and the work we do is more difficult and valuable than ever. But we’re not jubilant. Instead we’re more inclined to despair.