The 30% Granny Tax Trap Osborne Could Set for Labour

Well, Conservatives can take heart that at least incompetence isn’t restricted only to their own side, as a top Labour spin-doctor admits that they screwed up when they failed to vote against the cutting of the 50p tax rate.

However, it may well be too late now to repair the damage done by the incompetent handling of the gradual withdrawal of the age-related allowance (ARA) – the so called ‘granny tax’. The incompetence, however, was not to decision to withdraw it; it was a sensible move given that the significant increases in the standard personal allowance is making the ARA redundant. No, the incompetence is to miss the biggest win resulting from the move: the abolition – not imposition – of a granny tax.

The biggest negative side-effect of the ARA was the abatement mechanism: the gradual withdrawal of the allowance as the pensioner’s income approached the income limit (currently £24,000 for 2011/12). With £1 of allowance being lost for every £2 in extra income, the abatement added an extra 10p effective marginal tax rate on top of the existing 20p.*

Yes, George Osborne last week abolished the 30% granny tax.

However, thanks to the government’s slow-witted spin operation, it became regarded as the imposition of a tax. How useless does a PR operation at the highest level of domestic government have to be to manage such a disastrous inversion of the message?

Those pensioners who are only on the state pension will not be affected by the ARA withdrawal, as they will be nowhere near that abatement band. Those on more than £24k would similarly be unaffected, as they will not be benefiting from the ARA anyway. Those in the middle are being relieved of a 30% marginal tax rate. What’s not to like?

There is, at least, an opportunity here to salvage what little advantage may be left, to embarrass Labour and perhaps belatedly shore up some of the wavering support among the age bracket that is most likely to vote.

Labour will surely be tabling amendments on the ‘granny tax’. If the government spin-doctors can remove their shortest digits from their posteriors for a few minutes, then this could be legitimately presented as Labour trying to re-impose a penalty on age, a slap in the face for those who spent their working lives … blah blah blah…

I wouldn’t bank on it though. Frankly – and I shudder just typing this – Mandelson would have done a far better PR job.

* (It’s the same effect that creates a 60% rate, plus NI, between £100,000 and £114,950.

The Strivers’ 76% Tax Rate – Aren’t #UkUncut Happy Yet?

I’ve blogged before about the case for merging income tax and National Insurance, and it seems that it might be getting some traction in the Treasury. Just for fun though, let’s look at the draft rates for next year (2011/12) to see what the typical employee is paying in tax and NI:

So there you are, an employee with your modest 25k salary, say, happily thinking you are only paying tax at 20%. Yes, you’re not that silly, you know your actually paying 32% next year, don’t you, because you sensibly recognise that NI is just another income tax. So let’s merge them and be done with the pointless deception. yes, there are exceptions such as pensioners who don’t pay NI, but that’s a detail which can be sorted with a different rate or higher allowance. Focus, people!

However, as Tim pointed out a couple of days ago, you’re still wrong. Your employer has to pay the taxman 13.8% of your salary for the estimable privilege of employing you – you know, that “tax on jobs” we heard about in the last election, before the increase from 12.8% was scrapped. So the cost to him is not £25,000 but £28,450, of which you only see £19,362. So your graft is producing £9,087.64 – an overall tax rate of, coincidentally, about 32%.

Earn another £10 though, and how much will you get? Using the same rates, you will get £6.80 in your pocket, but generate £4.58 in tax and NI – a marginal rate of 40.2%. And yet you’ll open the ‘papers and they’ll talk about the 20% basic rate. Humph. Head north of those figures and, including Employer’s NI, the maximum combined marginal rate of all direct taxes is not the (rightly) much derided 50%, but 66.6%.

Yet it gets worse: what really puts the feline among the feathered rats of course is tax credits. With a clawback rate of up to 41p in the pound, someone earning a shade over the NI primary threshold (say £140 per week) would be paying a combined marginal rate of tax of 76.3%. The effective rates of tax that such clawbacks amount to is an inevitable consequences of tapering any benefit over a given income range. Not that I’m about to write an exposition of alternatives, such as negative income tax…

… at least not for now. It’s nearly time for PMQs, then the fun really starts.

(Usual caveat: you’re probably not a paying client, so be aware that all the figures above could be fundamentally flawed by my rushed arithmetic and need to be doing a proper job in the meantime….)

The Emergency Budget: A Triumph of Expectations Management

Well, the big headline – the 20% VAT rate was expected. Proportionately it is a lower increase than Labour’s return of VAT to 17.5% at the start of this year, introduced when the economy was arguably weaker than it’s likely to be next January. Not that I’m happy that we are increasing taxes – even marginally less unfair taxes such as VAT – but we all know who is really responsible, and it shouldn’t have been a great surprise for students of the nuances of political language – “we have no plans to…” means little in the unpredictable political climate of 2010.

All in all, the scare stories that were inexplicably circulating before the budget did make the actual thing seem a lot a expected. Capital Gains Tax will only go up to 28%, not the 50% that a return to a pre-2008 arrangement would have meant. Child benefit remains, albeit frozen. More interestingly, it remains universal; and, one could argue, why not, given that those on higher incomes have paid more tax and thus may feel entitled to get something back from the system.

Then the increase in the personal allowance will be worth around £200 to many people.

The bank levy will not be a transaction based Robin Hood Tax, and combined with the reduction in the main corporation tax rate may not trigger the flight that some feared – though time will tell. Expect other governments to now react in a similar direction, including the xenophobic White House (they may be itching to re-fight the American Revolution, but that won’t stop them welcoming, at least privately, the moves on this side of the pond).

There’s still more to digest, but that is largely a function of the quantity of significant measures in the speech, rather than the time-bombs that Labour used to hide away to explode during the committee stages. Something new that we will have to get used to, is the reaction of the Lib Dem coalition partners. Hysterical Hattie, in response to Osborne, may have a point when she highlighted how many Lib Dem MPs would have campaigned against the very measures contained in today’s budget.

Darling’s Stealth Council Tax Bombshell

Buried away in Wednesday’s budget speech was the latest waffle about efficiency savings – part of the government’s attempts well thought out strategy to shave a micron or two from cut the deficit. £11bn was the figure.

Part of those plans was £2.3bn from the Department of Communities and Local Government (DCLG).

Part of DCLG’s figures is £2.1bn from “local government efficiencies”. Now where have we heard that terminology before? Oh yes, it’s the fudge that is being used to pay for a major chunk of the costs of “free” home care for the elderly. In that case, it would be achieved by imposing extra duties and costs on councils without fully funding those responsibilities. In the case of the £2.1bn announced on Wednesday, it will simply be a case of reducing the amount of cash that central government gives to councils.

As anyone familiar with these things knows well, when the government says something will be paid out of “local government efficiencies” it means only one thing: it’s going on your Council Tax. If a council could find the required level of efficiencies, they would probably rather use it themselves, either to spend on other services or reduce/mitigate the level of Council Tax.

So, put bluntly, £2.1bn from “local government efficiencies” means £2.1bn on your Council tax … on top of the £250m (at least) to pay for “free” home care (assuming the bill survives and resurfaces in the next parliament).

Let’s grab ourselves an envelope, turn it over, and work out what this could mean:

What Is The Top Rate Of Tax?

I know it can’t be easy being a financial journalist in the aftermath of budget day, with so much to take in and summarise for the laity. It must be even worse for the political journos, who have to give almost instantaneous reaction on subjects which are probably not their first love: maths and finance.

A case in point was the changes to the VAT rate. So many reported the change as being 2.5%. Well, yes, in a way it was: the difference between 17.5% and 15% is 0.025 = 2.5%. However, 2.5% on 15% is actually an increase of 2.5/15 = 16.67% in the amount of VAT paid.

As if that tiresomely pedantic arithmetical issue wasn’t enough, how about when you start talking about the tax system itself?

Try this easy question: what is the top marginal rate of tax in this country?

We’re talking personal tax rates, for, say, a “typical” person of working age.

40%?
50% – the new “top rate” coming into effect in a couple of weeks?

Well, let’s have a look at the rates applicable to a typical full-time employee with one child (for 2010/11):

Income up to	Income Tax	National Insurance	Personal Allowance reduction*	Tax Credit withdrawal*	Total
£ 5,720	0%	0%			0%
£ 6,420	0%	11%			11%
£ 6,475	0%	11%		39%	50%
£ 23,753	20%	11%		39%	70%
£ 43,888	20%	11%		0%	31%
£ 50,000	40%	1%		0%	41%
£ 58,171	40%	1%		6.67%	47.67%
£ 100,000	40%	1%			41%
£ 112,950	40%	1%	20%		61%
£ 150,000	50%	1%			51%

Yes, the top rate of tax for high earners after April will be 61% for those on incomes between about £100,000 and £112,950. That 98% of the late Seventies doesn’t seem so far off now does it?

Now, I doubt those in that income bracket would be regarded as poor, but have a look at someone in the £6,475 – £23,753 range: they are paying 70%, not just from next month, but for quite some time to date. So there are some people on just £125 a week forking out 70% on every extra pound they earn.

I have spared you the horrors of the implications for pension contributions for those bringing in more than £130,000, the added complexity of the 10p band (yes, it’s still there for a few lucky souls), the age-related allowances and their withdrawal rate, the special rates for dividends … come on, wake up at the back! All this, together with the dark art of the tax credit calculation, does mean that the table I threw together above could have various permutations, but the essence is the same.

So, to all the journalists out there, a helpful hint: the new top rate of tax will be 70%, not 50%, and that’s for among the lowest paid. What’s more, it has been for some time now.

* Just to explain the two less familiar columns above: tax credit withdrawal rates are essentially a tax – for every extra pound you earn, you lose 39p back to HM Treasury. The personal allowance is withdrawn at the rate of £1 for every £2 extra income, taxed at 40%; so that’s 40p out of £2: 20%. Also, I have used the 2009/10 tax credit rates – what I had to hand – so the £23,753 might change slightly in 2010/11.)

(BTW, this lot does not count as professional advice. Placing any financial or tax planning decisions on a blog post, even by an accountant, would be a silly thing to do.)

UPDATE 25/3: I’ve had a chance to check and update the figures (around the 50% rate in particular) following the budget speech, and it’s even worse – the top rate of tax is still the 70% hitting low earners. Nice one, Gordon!

Oh Yeah, The Budget

Dull was it? Well what did I tell you.So what was buried away in the press releases?

• Big hike in National Insurance (boo!)
  • The upper limit for Class 4 NI (which the self employed pay) has jumped by £5,200 – that is, £5,200 being taxed at 8% instead of 1% (£364 since you ask). (Update – ah yes, the Class 1 (employees’) threshold has increased also – and that’s a £520 per year tax increase.)

• Attacks on independent taxation of married couples postponed for a year (meh)
  • Darling has postponed until April 2009 measures which aim to stop the disgraceful behaviour of a spouse sharing their income with their other half. Apparently this practice is “unfair” according to the government. Frankly, I wouldn’t dare trying that argument with my better half.

And a load of stuff we already new about, but the media needed to fill airtime and space, so we had (again) the corporation tax rate cut to 28% (though not so much mention of the small companies rate going up to 21%), the Capital Gain Tax changes … oh, and the public finances are screwed.

Budget Day Ain’t What It Used To Be

When I was starting out in my chosen profession, budget day was something special in the office. The one day that radios were allowed to be on, and a late afternoon of comradely toil in the basement with risograph and staple machine, putting together the special same-day budget briefings that the tax department had cobbled together during the speech.

Nowadays, half of it has been announced in advance either in previous budgets or the pre-budget speech (e.g. the tax-cut-that-isn’t-quite* as unveiled by Brown last March .. or the Inheritance Tax relief-that-isn’t-really** from Darling last November). Oh, and then there’s the sort-of-u-turns that happen in between.***

The other half – the nasty stuff – won’t come out for another couple of months when the Finance Bill wends its way through the committee stages, long after the financial hacks have moved on from making pretty “what it means for the average family with 2.4 smoking children and 4×4-driving dog” graphics.

So I’m not particularly bothered that this Wednesday I’ll be sitting on the panel interviewing the long list for a director position in my Council, rather than hanging on Darling’s every vacuous word. Nor that I’ll not be availing myself of the 7:30 am “Budget Breakfast” briefings the following morning.

Actually, the latter is nothing to do with the modern budget event, rather that breakfast meetings are, to me, just … wrong. Not unless they are being held in my front room and you don’t mind me attending, Arthur Dent style, in my dressing gown.

* He cut the basic rate to 20% … and doubled the (former) starting rate to 20%. Not much good if you’re on £18,000 or less.

** He allowed couples to share their IHT thresholds (which they could do already with the right paperwork), and still couldn’t match Osborne’s £1m proposal.

*** The “Entrepreneurs’ Relief” that is coming in alongside the 18% Capital Gains Tax rate, but which has the customary ball of strings attached.