November 24th, 2014

Tax Doesn’t Have to Be Fair: From the Cradle to the Grave

The UK tax code is one of the most complex in the world, running to over 10,000 pages of legislation (in size 6 font, too, so not only a test of your legalese, but how good your eyesight is). It’s inevitable that some inconsistencies will arise. Here are a few examples from the cradle to the grave…

Not many people know that Income tax can be levied on income from the day you are born up to the day you die. This “no tax until 16” myth prevails because many children receive bank interest without the bank deducting basic rate tax at source. This occurs simply because the majority of children don’t have annual income exceeding the personal allowance, not because children are exempt from tax.

This seems fair on the face of it, but children are not able to vote until the age of 18. They can contribute tax to the government’s coffers but not vote on how that tax is spent. Plus, this all means income earning children – like child actors and models – will have less money to spend on Panini stickers and sweets.

Another area where the self employed have traditionally lost out. Employees can sacrifice up to £243 of their salary in exchange for childcare vouchers per month – and thereby gain tax relief. The self employed, inexplicably, have always been denied tax relief on childcare costs simply by virtue of being their own boss.

The good news is that tax relief will soon be available to the self employed via the new government supported childcare scheme, which will allow employees and the self employed to pay into a central pot that the government also pays into (kind of like how private pension contributions currently operate).

Council tax
Council tax is a flat rate tax based on the value of your home. The value was set in 1991 and this determines which of eight council tax bands your home falls into. Here’s a challenge: try and find out the value that was assigned to your home in 1991. You can’t find it can you? So how do you know you’re in the correct council tax band? Furthermore, the difference in council tax between the lowest and highest bands is only in the region of £2,000 per year on average. So the council tax due on a £10m mansion is only around £1,500 per year more than the that due on the average UK band D property. This makes council tax a “regressive” form of taxation, which means the rate of tax decreases as the amount subject to the tax increases, i.e. inherently unfair!

The Dead
You won’t be surprised to know that death doesn’t necessarily signal the end of your tax obligations. Maybe Benjamin Franklin’s famous quote should have referred to three certainties: death, taxes and death taxes. Inheritance Tax (IHT) is an emotive subject. Murmurings of abolition engender tax-cuts-for-the-rich responses while those well-to-do enough for it to be an issue will see it as a way of taxing wealth that has already been subject to income and capital gains tax. Without adequate investment or tax planning advice, a static estate will reduce by 40% each time it passes to the next generation so the government would eventually get almost all but £325,000 of such an estate in the end.

Would a fairer system be to tax only a rise in the value of the estate during the deceased’s lifetime, essentially meaning the estate would be subject to capital gains tax rules? Maybe, but it’s unlikely that IHT rules will change so drastically in the near future.

John Mansley BSc ACA

If you need any advice about your tax situation then please get in touch. Call us on 0151 426 4512 or email us here.

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John manages a wide portfolio of owner managed businesses and oversees the smooth operation of the firm’s payroll department.

After obtaining his degree in mathematics from the University of Liverpool, John joined Jonathan Ford & Co in 2004 and qualified as a chartered accountant four years later. John likes to keep abreast of developments in tax and accounting and is responsible for the mentoring of junior staff.

Outside of work, John enjoys keeping fit and is a Liverpool FC season ticket holder.

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