Merryn's Blog

More taxes are coming, but the rich might not be paying them

Parties across the board are determined to raise taxes on the rich, says Merryn Somerset Webb. But that doesn't mean the tax-take will be any higher.

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A letter from a reader. He takes issue with the idea expressed in the chart in my last blog that it is not really possible for the tax-take in the UK to go above 37% of GDP. That may have been the case up until now, he says, but given the determination of all parties to tax, tax and tax again, the take will surely go up.

He's a well-off multi-property owner and can't see how he can avoid any of the taxes coming his way without disrupting his lifestyle in a way he really doesn't want to. I see his point.

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And it is absolutely true that he will be paying more in tax in the next few years. But not everyone well-off will be. Some will leave. I heard of two non-doms heading elsewhere last week they don't want to wait around to "see how this story plays out".

There won't be hundreds of thousands of people prepared to leave their UK lives just to pay less tax, but with ill-defined mansion taxes and marginal income rates of 50% or 60%, there will be rather more than EdMiliband thinks.

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And they will be people that, for all the "I'll drive them to the airport" rhetoric from the nation's dimmer columnists, we don't want to lose: let's not forget that the 1% pay 30% of UK income tax. Those that stay will then work harder on avoidance.

It will be worth the well-paid making more effort to be freelancers or contractors rather than employees, and being paid through personal service companies with all the tax advantages that brings (this isn't that hard just ask the BBC).

There'll be more work put in to turning capital into income and ordinary income into dividend income. And it will be worth using Isas, Jisas, EIS and SEIS schemes, VCTs and the like even more than it has been up until now, as well as using pensions to hand money on to children (once yours is full, why not fill one for your kids? After all, there is no life-time limit on contributions.).

Financial advisers will be able to make more suggestions on all of this, I am sure. And failing all this, the well-off simply reduce the tax they pay by working less. If you are making £160,000 and someone offers you £4,000 to take on another project, and you know you will only see, say, £1,500 of that (with a 60% rate plus 2% NI), perhaps you won't bother.

It doesn't seem fair, and anyway, you'd quite like to spend some time with the kids. The contract then goes to someone in the 40% bracket (or to no one), then the tax take falls accordingly.

All these little things add up. So while the reader mentioned above is likely to pay more in tax, a good many other readers will figure it out somehow so they don't. And that's what makes 37% a magic number in the UK. If only our politicians knew.

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