Calls for a Flat tax to help middle income families

Institute of Directors calls on Government to bring in flat tax to help middle income families

The Institute has suggested that Britain should introduce a ‘flat tax’ system to stop middle income families from paying punitive rates. The Director General, Simon Walker, said that high marginal tax rates ‘degrade the motivation to work’ for many.

This call for action comes after it emerged that some middle income families are paying an effective rate of 73% because they have been stripped of their child benefit. Experts say these families are effectively paying more than someone on £150,000 might pay.

Households where the biggest earner has a salary of £60,000 or more saw their child benefits scrapped in last year’s Budget. Households with someone earning between £50,000 and £60,000 lost an increasing proportion of the benefit under the change that came in on 7 January 2013.  Child benefit brings families £20.30 per week for the first child and £13.40 per week for each subsequent sibling, therefore those affected have lost an average of about £1,300 per year.

Civil liberties threatened by Hmrc proposals?

HMRC data sharing plans may infringe civil liberties, says LITRG

HM Revenue and Customs’ (HMRCs’) proposals to increase its scope to publish or share more widely the information it holds are cause for concern, according to the Low Incomes Tax Reform Group (LITRG). The charity supports proposals to publish more data externally about HMRCs’ activities, such as services, budget costs, functions and performance. However, it believes there is insufficient evidence and research that the publication of individual-level data, even after efforts have been made to make it anonymous, would provide any clear benefit.

LITRG is therefore encouraging the retention of the current legislative structure with a more rapid administration process and sharing of HMRC data with other government departments and public bodies only where the case for this is specifically proved.

Tax breaks for married couples – more social than financial

Effect of new tax break for married couples is “small” says IFS

The social message sent by the new tax break for married couples looks more significant than its financial consequences for families according to the Institute for Fiscal Studies (IFS). This comment follows a speech from the Prime Minister on how the Government proposes to recognise some marriages and civil partnerships in the income tax system.

From April 2015, the Government plans to make up to £1,000 of the income tax personal allowance transferable between adults who are married or in a civil partnership, so long as the higher-income adult is a basic-rate taxpayer. According to the IFS, if an individual were not using all of their income tax personal allowance – because their income was less than this sum – then they would be able to transfer up to £1,000 of any unused allowance to their spouse.

This transferred amount would lower the spouse’s tax bill by up to £200 a year, and the amount of basic rate income tax that would be paid on £1,000. However, the transferred allowance will not be available to higher rate or additional rate taxpayers – those with taxable incomes exceeding £42,285 in 2015-16. As the maximum gain is less than £4 per couple per week, effects on incomes and incentives would be small, concludes the IFS.

How much income will you need in retirement

The Department for Work and Pensions (DWP) has been mulling over the answer to this question

The gradual introduction of pension auto enrolment and the forthcoming reworking of the state pension system will alter the pension landscape in the years ahead.  The DWP has been considering how it should gauge the impact of its measures on retirement incomes, something that you might have thought deserved attention a little earlier on in the reform process. The Department’s number crunchers have produced estimates of adequate retirement incomes as a proportion of pre-retirement incomes. The results are shown in the table below.

If the earnings bands look rather strange, it is because the DWP has taken a short cut in deriving the table. Instead of starting from scratch, it just copied the income replacement rate table produced by the Pensions Commission in 2004 and updated it in line with the growth in earnings. The average increase in each band of around 28% is less than price inflation since 2004, based on the RPI, but just about matches CPI.

The DWP calculates that on the basis of its proposed replacement rates, 12.2 million people are still facing inadequate retirement incomes, even after its reforms kick in. It says that “Roughly half of these [12.2m] are within 20% of their target amount, with the remainder facing a more significant challenge. This is a particular issue for moderate and higher earners.”

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Labour party tax policy

Not much wiser

Last month’s Labour Party conference produced little in the way of fresh tax policy details. Ed Balls, the Shadow Chancellor, said little new and neither did his Shadow Treasury chief secretary, Rachel Reeves. So what do we know so far?

• The 10p income tax band will be reintroduced, having been culled by Gordon Brown shortly before he became prime minister.

• There will be a mansion tax for properties worth more than £2m, echoing Liberal Democrat proposals.

• The final planned reduction in corporation tax from 21% to 20% in 2015 will be scrapped, with the money raised being used to cut business rates for small businesses.

• “The highest earners” will have the tax relief on their pension contributions cut to basic rate, probably using a method legislated for in 2010, but then abandoned as too complex.

• The top rate of tax will return to 50% at an income level of £150,000.

The biggest piece of news from the conference was not on the tax front, but Ed Miliband’s promise of a 20 month freeze on utility prices to the start of 2017. This pledge served as a sharp reminder that utility company shares, long popular among income-seeking investors, are not without political risk.

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