The Financial Times has recently published a list of the top 10 issues that affect personal taxation, from higher marginal tax rates to pensions, illustrating how complex the personal tax system is in the UK.
For example, the Institute for Fiscal Studies (IFS) is exercised about National Insurance Contributions (NICs) because the “separation of income tax and NICs encourages people to believe, wrongly, that NICs are a payment for future benefits”. As a spokeswoman for the think tank points out, the different thresholds and rate schedules of NICs are “unnecessarily complex”.
Another complexity bugbear is high marginal tax rates, with a spokesman for the Institute of Directors (IoD) saying that the abolition of these “disincentivising and punitive marginal income tax rates” is at the top of the body’s ‘simplification wish list’.
As he points out, the highest rates of tax are often levied on people with much lower incomes than on those earning more than £150,000 as a result of the withdrawal of allowances and benefits.
In fact, high marginal rates are experienced by some of the several hundred thousand families in which the highest-income adult earns £50,000 to £60,000, as some of their child benefit is clawed back.
The extra marginal tax rate is around 11 per cent of income and seven per cent for each subsequent child. Meanwhile, around the same number of people are also affected by a 60p rate on earnings of £100,000 to £123,000, caused by the withdrawal of the personal allowance.
Working out the relevant rate of capital gains tax (CGT) is also now a lot more complicated because of the difficulty of calculating gains where income has been accumulated or reinvested.
Pensions are another area of complexity and confusion, particularly for those who earn more than £150,000 and are caught by the new annual allowance taper. If they inadvertently breach the limit, they face unexpected tax bills of up to £13,500.
