Tuesday, 26 June 2012

Goal 78: How much tax do you pay?

Goal 78: Be earning £100,000 a year within 5 years

A few years ago I wouldn't have considered writing a goal like this. But, I've found that setting goals and working towards them has broadened my perspective.

I'm now earning what I feel is a reasonable amount for my experience and skills but I'm conscious that despite the increase in my earnings over the last few years, the extra money I make doesn't go much further than it used to. Inflation will play a part as will changes in our family and lifestyle but I've come to realise that tax plays a huge role in reducing my income.

Below is a table showing income and associated tax for an individual earning an increasing amount of money. I've assumed some of the tax based on my own situation and that some taxes will remain stable which in reality - in the case of council tax for instance - I doubt would be the case: earn more, move house, pay more...

Income £20,000 £30,000 £40,000 £50,000 £100,000 £1,000,000
Tax burden 49.6% 48.3% 47.6% 48.4% 51.0% 59.8%
Tax paid £9,920 £14,480 £19,040 £24,203 £51,003 £597,577
Income remaining £10,080 £15,520 £20,960 £25,797 £48,997 £402,423

Tax breakdown

Income tax £2,379 £4,379 £6,379 £9,884 £29,884 £470,102
National insurance £1,489 £2,689 £3,889 £4,337 £5,337 £23,337
Council tax £1,100 £1,100 £1,100 £1,100 £1,100 £1,100
Insurance premium tax £20 £20 £20 £20 £20 £20
Car road tax £200 £200 £200 £200 £200 £200
Fuel duty £1,600 £1,600 £1,600 £1,600 £1,600 £1,600
VAT £3,002 £4,362 £5,722 £6,932 £12,732 £101,088
TV Licence £130 £130 £130 £130 £130 £130

What I find fascinating in the above calculation is that the tax burden is almost unchanged from a person earning £20,000 to someone earning £100,000. (This is taking into account the personal allowance)

How can this be? How can our government honestly justify taking the same percentage of tax from people earning such vastly different amounts?

There is a radical difference in the tax burden when you factor in tax allowances for those supporting children:

Income £20,000 £30,000 £40,000 £50,000 £100,000 £1,000,000
Tax reductions/benefits

Child Benefit £2,256 £2,256 £2,256 £2,256 £2,256 £2,256
Working families tax credit £6,000 £4,000 £1,000 £0 £0 £0

Income after reductions/benefits

Income remaining £18,336 £21,776 £24,216 £28,053 £51,253 £404,679
Tax burden 8.3% 27.4% 39.5% 43.9% 48.7% 59.5% 

I currently receive child benefit and over several years have appreciated receiving tax credits but there still seems something very wrong with a society where an individual cannot earn enough to provide for themselves and their family without having to receive a bailout from the State.

What these tables tell me is our government does not want to encourage people to work harder and earn more. The reward for earning more in our country is to be taxed higher and higher.

What signal does this send out?

I believe the government provides some essential and neccessary services and can greatly provide for society through economies of scale but I want the right to decide where the money I work for goes. I want to see the fruit of my labour and decide for myself how to spend, save, invest or give that money.

I've made assumptions with all the above figures but the rates of tax and national insurance are taken directly from the UK Inland Revenue site. I am happy to share the formulas used.

How do you feel about how much you are taxed?

Monday, 25 June 2012

To Jimmy Carr with sympathy

I have a lot of sympathy for Jimmy Carr. Identified by The Times newspaper last week for his decision to use a tax avoidance scheme resulting in allegedly reducing his tax bill to around one percent.

He has been condemned in the media for his lack of morality and ethicality. The UK Prime Minister has even condemned his use of a tax avoidance scheme as morally wrong.

So why do I have sympathy for him? In large part because I resent the high amount of tax I have to pay. Watching Channel 4’s 8 Out of 10 Cats show this week I was struck by one comedian commenting on the NHS and other ‘worthwhile’ government bodies having to lay off staff because ... some people ... don’t pay enough tax. It is an argument that I find questionable.

The UK government, my government, spends billions of the revenue they get each year on activities that millions of voters find reprehensible. Let me go on record as saying I was not against the government’s decision to go to war in Iraq. But millions of people were. How many of those people who did not want our government to spend a penny on that war now condemn Jimmy Carr for attempting to reduce his tax burden?

What about the government pouring money into quangos, consulting firms, jobs for the boys? Billions spent on IT Computer systems that fail to deliver the promised efficiency and savings. Money spent on countless schemes that have little measurable value. Money poured into the Arts and Sport without you or I being consulted as to whether we value the investment made.

Yet when anyone tries to reduce their tax burden they are condemned for taking money away from doctors and nurses...

What percentage does the NHS receive from your taxes? The Guardian newspaper has helpfully provided a useful breakdown and it’s actually far more than I realised: £130 Billion out of £683 Billion – a whacking 19%!

What would be really fascinating would be to further break that down and find out how much of the NHS services are required due to violence; drug abuse; alcohol abuse; smoking; or obesity. Would we be so keen to give more money to the NHS if we were actually told what the money was used for?

I have greatly benefitted from the NHS throughout my life. I suffered from Asthma as a child and still require occasional treatment. I have been given five star treatment by nurses and doctors; have been operated on to save my life; even benefitted yesterday from their out of hours program to get advice and a needed prescription.

I agree that there are efficiencies of scale. That government can provide benefits to us as a population when it uses our taxes wisely. The problem is that I don’t believe the government is using our taxes wisely and this is on top of forcing everyone in the UK to pay far more tax than I believe anyone should have to pay. How much tax do you pay? Do you really know?

I suspect that everyone who earns between £20-£50,000 a year will pay more than 45% in tax. Sound way off? What happens when you factor in income tax, national insurance, council tax, fuel duty, insurance premium tax and on top of that – VAT on the vast majority of our purchases... Does 45% still seem too much?

It is.

The Guardian chart illustrates that our government is currently spending 13% more than it receives in tax. That is £91 Billion it has to borrow today and we have to pay back tomorrow. Do you really want to be taking on that much debt each year?

As I said at the start, I sympathise with Jimmy Carr. I want to pay less tax. I want the government to be 100% honest and transparent about where our money goes and give us far more say in what tax is spent on. Personally I think Mr Carr went too far in his attempt to reduce his tax burden but in comparing Carr and Cameron I believe the government’s mismanagement of our money is the real moral outrage.