The Chartered Institute of Taxation put out a press release this morning saying:
In these turbulent economic times, the CIOT believes it is even more important that the Government thinks very carefully about how it approaches the difficult issue of income shifting. The CIOT has long argued for a fundamental review of small business tax as this would help resolve many inconsistencies including reducing the effect of the shifting of income.
I agree with them. I also note that last year they broadly supported my approach to this issue when that in turn as proposed by an Early Day Motion in parliament. My approach is summarised here.
But I want to add another very important point now. This summer I proposed the creation of a new Class 5 of National Insurance. This would be charged on all investment income received by a tax resident UK person in excess of £5,000 a year at the rate of 10% unless that person was of pensionable age or was receiving the income from a trust created for the benefit of the disabled.
My logic in making this proposal is simply stated. It is wholly unreasonable that income derived from human effort is charged at a lower rate of tax in the UK than that which is derived from investment activity. That is more especially true now that the government has had to spend vast sums of taxpayers money to bail out the banks in which those who are enjoying this investment income have placed their funds. They have a special obligation to make payment for the benefit they have received.
But there is a side effect of this which is just as important: this rule would also destroy most of the attraction of income shifting through private limited companies, and rightly so.
It's an idea whose time has come.
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I can see the logic of this Richard as a solution to a number of issues as you say. However it would also perpetuate the increasingly unjustifiable distinction between tax and NIC.
I just wish we could have more transparency. By definition your 10% Class 5 NIC surcharge would be a tax. It would not be ‘insurance’. Let’s encourage honesty in taxation. And that means removing and replacing those elements of ‘National Insurance’ that are simply a way of disguising what are, in effect, additional income tax charges.
Hi Richard, I’m seeing regular inconsistency here. You are against living off credit but you are also against build-up of capital to invest!
If your house goes up in value do you expect to pay income tax every year? Of course not! If your shares go up in value do you pay capital gains tax every year? No, you don’t. Yet you argue time and again for the annual taxation of savings.
Your target value is savings over £100,000 earning 5% p.a. Sounds like a lot of money and would be popular with the general UK public because they never have any savings… they live on credit. Yet you criticise them for that.
So what is £100,000… what does it buy. In Canada it was considered prudent, before the credit boom, for banks to demand a 25% deposit. The average family home there is CN$750,000, about £400,000. So that £100,000 doesn’t make you rich, it just gets you into your first home to start a family, and it stops irresponsible people buying and credit bubbles forming, yet you are working against that.
It’s an obvious error, as I’ve already pointed out here, to claim that money earned in interest on an account is ‘unearned income’. Government inflation figures in the US, the UK, and the EU are deliberately inaccurate. You know that the CPI doesn’t reflect true inflation. I’ve seen you link to Shadow stats so you know their current calculation is that US inflation figures under-estimate by 8% (http://www.shadowstats.com/alternate_data), and I don’t need to tell you that bank accounts don’t pay enough interest to cover inflation. Savers are lucky if they break even. So be clear, what you are advocating is the whittling down of savings.
A good savings account rate now is 6%. Inflation in the US is 12%. Capital in the bank is losing value at a rate of 6% per year (for those who cannot stomach the shares roller coaster). You are advocating that savers lose another .6% (over around £100,000).
The rich will invest in shares and with a good fund manager make all of inflation and some income… but you wouldn’t touch that until the one time they sell and don’t reinvest.
What you are pushing for is a middle-class tax… a responsible capitalists’ tax. That’s a tax on children’s education, a tax on family life, a tax on small start-ups and all of those things are the life-blood of a healthy economy. Please stop arguing to tax the middle-class out of existence. If you cannot see the consequence of that… I’m in Brazil at the moment… come over… I’ll show you the areas I know. Come and see what’s happened to the middle-class here in the last 10 years. They call themselves the ‘novo pobre’… the new poor.
I’m right behind you pushing for responsible accounting, earning what we spend, and earning to invest. You argue against your own goal when you advocate the whittling away of middle-class capital.
On this point, unlike many others, I agree with you entirely, Richard. What really mystifies me is why this apparently obvious solution to the whole limited company vs self-employment issue hasn’t been considered before. I would add though that – in the interests of fairness – perhaps class 4 and class 5 NIC ought to give you some entitlement to S2P (if it is still called that). Otherwise, as Mark points out, it is a tax and not national insurance at all.