Time for Class 5 National Insurance

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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.