I am a little bored of discussion of the cost of social security from which we all, unambiguously, benefit. I thought it time, assisted by some reader prompting, to look at the cost of the tax subsidies to the 12.7% or so in the UK who are higher rate taxpayers.
Let me start with some caveats. What follows is just a stab at this issue. It is not a proper study; it is indicative. The data comes from HM Revenue & Customs, and I have generously excluded some costs where the major benefit goes to those well off (VAT zero-rating on train fares, for example). I have also had to guess the proportion of some reliefs, e.g. on ISAs, capital gains tax reliefs and venture capital trusts that go to higher rate tax payers. Some of these guesses could be a little out, but I suspect not by far.
I have also, very deliberately, not included the full cost of pension tax relief for those on higher rates in the costing and only that part above basic rate as I think that relief should be restricted to that rate but not abolished. On the other hand I have not shown the cost of capital gains tax being taxed at rates well below income tax, but I have questioned why a second annual allowance needs to be given to those who make gains which most will never enjoy.
I have included the VAT exemptions of private healthcare and education as a subsidy. I think that appropriate.
I have ignored all tax avoidance, income shifting, use of companies and other tricks to lower rates. This is a deliberately simple estimate. I have, therefore, tried to be balanced, and this is what came out:
Something like £29 billion of tax relief is given to the higher rate tax payers of this country each year. That sum is shared by about 4.4 million people. That's £6,695 each.
I stress; this is a very broad estimate and of course the benefit is not equally shared. But if we're to have a balanced debate, is this right?
And if it is why are we complaining about Jobseekers's Allowance that can be as little as £56.80 a week?
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This work needs to be amplified and publicised! WE also know that in work Housing Benefit is a subsidy to companies that don’t pay a living wage not to mention the Workfare related subsidies.
The Tories have succeeded in creating their politically necessary Scapegoat and the myths will not budge -the dumbed down world of ‘little England’ seems to enjoy the foul condescension. Nye Bevan’s infamous Manchester speech during the battle to create the NHS when he said the ‘Tories were lower than vermin’ is much more applicable now! Yes, its a dehumanising expression but one directed at dehumanisers.
Very interesting Richard and something that doesn’t seem to feature in any debates when discussing “cuts”
Your analysis shows an additional £15bn of pension tax relief due to basic rate (or left after reduction of higher rate relief). Any government in 2015 is going to need to make more savings & maybe this should be on the table as well?
I think it may be….
“Your analysis shows an additional £15bn of pension tax relief due to basic rate (or left after reduction of higher rate relief). Any government in 2015 is going to need to make more savings & maybe this should be on the table as well?”
This would of course be the same HMG that wants more people to save – I’m not sure how chopping reliefs on assorted types of savings schemes is actually going to encourage people to save…
….and be less dependent on the public purse in later years.
Actually, the relief is captured by the City
Many people would be better off saving outside pension schemes
If HMG want people to save there are other ways of doing this than singling out one type of savings for special treatment. One might almost call it a major market distortion. Which the right usually oppose unless it’s directly in their favour (see also help to buy, funding for lending which were proposed as ways of “fixing” markets that were “broken”)
This would be an excellent step forward towards reducing inequality. Interestingly, Christine Lagarde in her David Dimbleby lecture on Monday drew the link between lowering taxes on corporate income (a race to the bottom, she added) and worsening inequality.
I missed it
Worth watching?
Definitely. The first link below is to the transcript, the second to i-player.
http://www.imf.org/external/np/speeches/2014/020314.htm
http://195.188.87.10/iplayer/episode/b03ttn4b/The_Richard_Dimbleby_Lecture_04_02_2014/
The only (current) politician I noticed in the audience was Vince Cable.
Worth watching, although she clearly comes from a reasonably liberal point of view. She has turned far more free-market since at the IMF. As French finance minister, she had sometimes protectionistic attitudes. (I guess that keeping France and its screwed up system does not allow anything else).
No other politician, but front row, center, was Marc Carney, the only person she addressed, her friend…
As for tax, it was a very small mention after environment, demographics and income inbalance (which some people think they can solve through tax)
Where does your figure of £2.6bn for VAT exemption on education come from ?
Most sources cite the charitable status of private schools as being worth “only” £100m annually.
http://www.theguardian.com/politics/2010/jun/18/david-miliband-private-school-subsidy
Clearly to that one would need to include private tuition, but it would still seem well short of your £2.6bn figure.
HMRC….I used their data
VAT exemption is far removed from the charity subsidy
I recalculated it like this
There are roughly 750,000 children born a year
There are 13 school years
7% of children go to private school
Average fees are £20,000 (half day, half boarding – give or take)
That gives annual income of £13.65 billion
VAT at 20% = £2.73 bn
Looks the right ball park to me
Many Private schools charge a lot less than £20k. So you have sexed it up a bit.
It’s an average…..
And a mere reasonableness test at that
The data is from HMRC
I am not sure about this calculation because the school fees you quote appear to be based on secondary education (excluding primary) and I very much doubt that 50% of children in independent schools are boarders. I don’t think there are all that many boarding schools and certainly there are very few primary boarding schools.
Have you factored in the saving the state makes when it doesn’t need to pay for the child’s education?
All I have done is a sanity check on HMRC data
It looks fine
Ask them if you want to know more
And the saving is *********
I thought I should say that it appears to me that there is little reason why the ‘boarding fee’ shouldn’t be split out from the ‘education fee’ and VATable. After all the boarding fee is rather similar to a hotel fee. Of course if this occurred there would be a substantial reclaim by the school for input tax on things related to that supply.
Cost to the state if all those children went to state schools using the same finger-in-the-air estimates = £4.485bn so seems the state is doing better there.
Oh dear
Marginal costing may not be in use here
Are you therefore saying that by not sending their kids to a private school, the rich would not benefit from this £2.6bn tax break?
I am not sure how the overall tax take would increase from this? Surely the state education system would need to cope with an additional 7.5% pupil intake. The cost of this would surely exceed £2.6bn??
It may well cost less than that, yes
So to clarify are you saying that investment in business isn’t a good idea. So really people who invest in the country shouldn’t put up with the stress of corporate life. Instead they should do nothing, then all is okay.
I also presume you don’t agree with the IFS http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/10620555/UK-tax-system-is-punishing-success-says-Institute-for-Fiscal-Studies.html
That Telegraph article is absurd
And a for the stress of corporate life – you clearly have no clue what it is to be an entrepreneur
I have. I have done it. Several times
I know what I am talking about and it is nothing like corporate life
Are you saying running companies isn’t stressful?
Running companies is far removed from corporate life
Running companies is fun
Forget the crap about stress – it’s a high most people would love
Running a small high tech company (a six people SME for 10+ years) was a real high. You are focussed on a few products, work with people you trust – technically, personally and professionally; each sale a high, the trips abroad fun. When you don’t earn much its still fun, because you have a high level of control. Public sector work (30 years) can be highly stressful with very long hours – I’ve had my breakdown and survived. I’ve had a taste of corporate life and its tough.
RM – I recognise all the benefits the better off gain. I personally benefit on pension payments, (modest) ISA relief and professional subscriptions, but for me, not any capital gains, property, inheritance, educational or private health care. I do know professional colleagues who benefit from all of the above. The stress of being unemployed is crushing — I witness it. We desperately need a rebalancing of the political discussion on employment, blame/disinformation/fear is the easy option and our politicians enjoy the privilege of taking it.
Rather than just writing the article off as ‘absurd’ perhaps a more credible response would be to state why you believe that….
You say that you have been an entrepreneur ‘many times’ – presumably not a very successful one?
Maybe you have not heard of a ‘serial entrepreneur’
For the record no company I was involved with failed
There are many reasons why people start up small businesses, one is that you’re probably damn good at something (with talent/energy/hard work/luck). A mentor of mine told me “only 1 in 7 businesses (startup ‘high tech’ ideas) will make a living and 1 in 20 might make a lot”, needless-to-say I am not rich. But my old friend and mentor was basically saying you start a business for adventure and to earn groceries, any more was a bonus. His numbers were probably just guesses to illustrate the point. By the way high tech SMEs (in my area) often fail or morph or become successful (provide more jobs) at regular intervals – its part of the dynamics. When they are very successful you will move on (often forced out) – as they did with my old mentor.
Agreed!
I have done high tech
So we need to take pity on the higher rate taxpayers in “corporate” life (note there are many other higher rate taxpayers), accept that their huge salaries are not compensation enough and give them loads of extra tax breaks as well for being so heroic?
They pay more tax now because they have captured a larger share of income.
being out of work IS more stressful, this is well documented
https://www.apa.org/about/gr/issues/socioeconomic/unemployment.aspx
No doubt you pedal the vacuus ‘life-of-Riley’ bullshit beloved of the gutter press.
Do these people really ‘invest’ in the country when they rely on the state to create a living wage whilst they money launder through foreign channels. The myth of the ‘job creators’ is as unfounded as the ‘Life-of-Riley’ crap. This after 35 years of the world of finance devoting more investment to real estate scams than SME’s????
What Planet do you live on Nick – Planet Ponzi, no doubt!
Oh dear is it becoming all too much for you.
If you can’t stand the heat then get out of the kitchen.
I’m sorry that I have no sympathy for you.
I’m saving all of this for the people that are paid less than a living wage or out of work through no fault of their own.
Real stress is worrying about how to pay soaring utlity bills, whether you might have to move from your home due to the “bedroom tax” and where your next meal might come from.
The members of the true entitlement culture wish to misrepresent the unfortunate unemployed and working poor as a distraction, so that we don’t notice their “benefits”!
im really confused now. are you saying those on less than a living wage should become serial entreprenurers as its less stressful than being on less than a living wage?
this is a tongue in cheek comment by the way !
I am grateful for the things I learn on this blog as someone not educated in tax.
One thing I don’t understand, and would appreciate an explanation from you or your other visitors to this site if you have time.
I don’t understand why the non-taxation of something (in this case, non-imposition of VAT on education) is a ‘subsidy’.
There are lots of things we don’t tax and nobody seriously suggests we should tax everything.
We don’t tax wealth. Is that a subsidy? We don’t tax at 75% or 95% – is the difference between that rate and the actual rate a subsidy? We don’t tax pet ownership — is that a subsidy?
If the answer to the above examples is ‘no’, then why should non-taxation of education be a subsidy? What makes it different?
These things are considered ‘tax expenditures’ i.e. the non-taxation is considered equivalent to a subsidy
Neutral question, i.e. not trying to make a point of any kind here. What does the concept of “tax expenditure” mean here?
Its normal meaning
Amazing how many that crawl out of the woodwork to defend those that don’t need defending.
The rich must be protected and the poor demonised.
Orwell himself could not have described a better vision.
Very interesting figures.
It seems a neat coincidence, glancing through the HMRC figures at http://www.hmrc.gov.uk/statistics/tax-statistics/table2-5.pdf, that something like 60% of income tax is paid by higher- and additional-rate taxpayers, and your figures show about 60% of reliefs going to them too.
Although I think the better comparative would be the 70%-odd you get if you include all the pension contributions due, not your right-hand column.
Playing with the numbers, the difference then comes down to all the VAT, CGT and IHT reliefs being obtained by those on higher incomes. If you strip those out and just look at IT and NI, it again looks as though high-earners get about 60% of the relief.
Interesting – thanks for posting it.
If anyone hasn’t seen this excellent demolition of the “job creators” lie that underpins the whole reasoning of “trickle-down” economics, not to mention the “rationale and thinking behind” (in inverted commas, since it begs the question whether they deserve to be called either a rationale or thinking, rather than naked self-pleading dressed up as science) of the neo-liberals on both sides of the pond, may I urge you to do so?
http://extremeliberal.wordpress.com/2012/05/18/the-job-creators-myth-shattered-nick-hanauers-ted-talk/
The look on the face of the facilitator, Donald Trump, at about 1 min 36 secs in is treasurable: he really looks, on hearing the “heresy” being propounded, as if he wished he were a King, able to hale Nick Hanauer off to the Tower, and hurry him to the block. For what Nick Hanaeur (a REAL entrepreneur, by the way, unlike Trump, or even more, Bob Diamond, who made his money by stunts such as trying to stitch up the LIBOR rate, and then placing a fixed “bet” on it) is “heresy” = that growth and job creation arise via a symbiotic loop between consumers/employees, businesses, and Government!
If I’ve posted this before, apologies, but it deserves repetition, every time people trot out guff about “the captains of industry”, most of whom wouldn’t know a real business if it mugged them on the way out of the expensive establishment where they’ve been closeted together with their co-conspirators, fixing things ni their favour in a “conspiracy against the public to raise prices”, to use Adam Smith’s phrase.
It is excellent!
You’re right about this “captains of industry guff”!
Consider this, when you next see a full page ad for virgin atlantic with Richard Branson grinning inanely, surrounded by cabin crew & pilots in their super shiny uniforms… that uniform is maintained by the employee & the UK taxpayer!
Can you explain how the UK tax payer is involved. Are you saying that VS isn’t paying their staff enough??
I am not sure Richard Branson has ever run any of companies. although I haven’t read the new book by Tom Bower.
The uniform cabin crew & pilots wear has to be maintained, as the employer does not reimburse this cost or provide laundry facilities tax relief can be claimed, hence the business is being subsidized by the UK taxpayers
ted hannauer is excellent indeed – a succinct and precise exposition of the issue and a huge myth exploder! This clip should be part of all A level economics courses.
perhaps the ghastly Gove could include in the ‘core’ curriculum!
I am not sure I understand this. If someone doesn’t start the company up, then they wouldn’t create jobs.
Mike-the myth being exploded was that TAX CUTS to the rich create jobs, not that entrepreneurs do not create jobs!
Andrew, thanks for posting (or reposting) this clip. I note the YouTube version – which I have bookmarked – is flagged as the “banned” TED talk. I’ve never checked to see if that’s true (though if it is it makes no difference as accessing it is easy), but it wouldn’t surprise me if an attempt was made to do that.
¨The private sector is evading its taxes, failing to pay workers a living wage, and becoming a burden on the tax payer for subsidies and bailouts. At what point to we stop calling them wealth creators and start calling them parasites¨
http://www.scriptonitedaily.com/2013/05/12/corporate-giants-arent-wealth-creators-theyre-parasites/
When you are treating some a reduction in tax (from those that effectively fund the country) as a ‘subsidy’ then you really have lost the plot.
Clearly you know nothing about the way tax policy is discussed the world over if you can say that
What would happen if all the wealthy didn’t take a salary all year. Whilst inequality will go out of the window, people like Richard would party. The country would receive no money.
You clearly know nothing about tax
I pay income tax on all I earn
I pay maximum class 2 and class 4 national insurance
I do not use a limited company when I can precisely because it could reduce my tax bill
I was making a comment about top rate tax payers, who pay a large percentage of the income for the country to run. If that is removed, their tax income, then the country has less money to run on.
This has been evident by bankers bonus tax. This was paid, especially up to 2008, in an increasing amount. The money has come in handy. Although like some exs now its gone people are upset.
Other high earners have tax contributions, which help the country in every way possible.
Obviously there is a secondary element, about home help, to dry cleaners. But that is another matter.
At no point did I care about our salary in the big scheme of things. I placed it here as some of the first of this thread was about people funding the UK.
Sorry for any confusion.
Not sure I follow the statement …
Inequality wouldn’t go out the window would it? …
First, the truly wealthy would still be wealthy and well able to live off their wealth even without a salary
Secondly, their salaries would probably not be redistributed to the poor so the poor would remain poor. Pretty sure that the companies these ‘wealthy’ work for would retain the cash.
I am not sure why you conclude Richard would party simply because a small minority of rich people forewent salaries. What strange logic, it’s not as if he personally or the people he is standing up for would be better off.
And I have no idea what this has to do with the topic at hand anyway — What has someone foregoing salary got to do with Richard questioning why we don’t focus more on various tax reliefs that are available and which are predominantly utilised by wealthy individuals so leading to his suggestion that maybe government should look at increasing its income by withdrawing/reducing those reliefs rather than focussing solely on reducing its costs?
No need to answer, just felt I had to make the point ïŠ
No, you use a partnership which means you can avoid paying employer’s NICs (which would be 13.8%) on the amount you earn – which is more than an MP’s salary looking at your LLP’s accounts. Roughly 8000 pounds worth of tax avoided there.
Like 4 million or more people in the UK I am taxed as a self employed person – which is what I am
And I pay the NIC due as a result
Since I am not an employee of anyone it is hard to see how I can be taxed as one
And I have argued that this is the correct position for all self employed people too
I am completely consistent
I have also made clear there should be no NIC upper limit
Now shall we stop being stupid here?
Sorry, I am a little lost here. You are a Director of a company, therefore you should be taxed that way. Or do Directors get a choice, company or LLP?
I think the comment relates to Tax Research LLP.
It is not a company. I am not a director of it – legally, LLPs do not have directors.
I am a member of an LLP. They are taxed as self employed people. So I am quite properly taxed as a self employed person. Which is what I am
“I do not use a limited company when I can precisely because it could reduce my tax bill”
Are you saying you choose NOT to operate through a company because your tax bill might be LOWER if you did? That you are choosing the method of trading that results in a higher amount of tax?
If that was actually your aim you WOULD operate through a company since £1,000 paid via a company would be paid £121 employer’s NIC and £879 to you with net income of £421, £509 or £598 depending on your tax band. Via an LLP your take home is £480, £580 or £710 on the same tax bands. NIC included in the calcs.
In other words, quite lawfully you are choosing a mechanism through which you trade that saves you tax.
Well done, that’s your right.
Just wonder why you constantly criticise others who choose to do just the same.
I find all this very odd
As I made clear before the House of Lords recently, LLPs will normally result in higher tax bills than companies
This debate is more than anything indicative of misinformation and prejudice and that is why many comments have been deleted
¨When you are treating some a reduction in tax (from those that effectively fund the country) as a ‘subsidy’ then you really have lost the plot¨
Nah…
They do not fund anything other than themselves.
You do not need a new car every year. Ditto mobile phone (I´ve had mine for nearly three years now, it still works well. Unlocked so I can shift providers to get cheap deals. Apple!)
Consumers are the ones who fund their own society. Unfortunately for the large corporations, people are making do with less. If you remove the motability purchases from the car market, you have a failing industry. And a certain IDS has started doing that.
Two of my neighbours have started a car-share arrangement. Loads of stuff like that going-on. People may dislike the idea of tax-avoiding companies, but they have no problem getting their heads around avoiding tax themselves…car servicing by your local friendly cash-in-hand mechanic….windows cleaned, for cash. The black economy is growing all the time. After all, if …… can avoid tax, so can everyone else (insert whichever large company/corporation you care to think of, along the way they´re all gaming the system)
Morals are an added extra. In hard times there is no reason to expect individuals to behave morally, still less so when ¨captains¨ of industry behave more like pirates of old, plundering riches and burying them on an island !!
It’s “Grub first, then ethics”.
Brecht.
Do you know how many on the high tax rate use CGT?? The rate of business disposal do they sell the companies to another company every year?? How many are really doing this?
Does the person being taxed ie Father get the inheritance rate, or is it his children who might not be a higher rate payer. Therefore not get the allowance.
I am not sure about health care. You are saying that everyone who is a higher rate payer is unwell. Can you prove this fact?? Many people get unwell are older and therefore not necessary a higher rate payer.
You entirely miss the point on healthcare – this is private healthcare, not all healthcare
Your other questions are too ill formed to consider
If a person isn’t ill, do they get the tax allowance as well. Or does it just remain with the people who are using healthcare. SO really not every person on a higher rate tax bracket, would get the allowance as they don’t use it. Or is this allowance added to everyones tax bill.
This is about buying private healthcare
No more
No less
I think I am seeing the confusion.
Middle class people buy healthcare (insurance) to cover when needed
The top 1% don’t. They have private doctors, they pay on the amex card. Or any other credit card. Private Gp, credit card. Its only £60 or so, for around 30 minutes. Okay you then have to pay medicine costs, unlike everyone else.
No
It is VAT on private healthcare
That’s it
What’s hard to get?
Well if a person isn’t ill, they don’t pay any money. Not everyone who is a high rate tax payer gets ill. So some wont get the benefit. That’s all. It wont affect them in any way.
If they are really ill, then they wont be in the office enough to be a high rate tax payer.
The same with child care or school fees.
Only the well off pay such frees
The are VAT exempt
How many times do IU have to explain?
Doesn’t everyone get this benefit. Or is it just the people who are top tax payers??
I presume you only use this benefit, if you are ill! (I think that’s the point of the comments)
Private health care is VAT exempt
That is a benefit
The vast majority of private health care is bought be the well off
So it is a subsidy to the well off
Is that so hard to understand?
You’ve missed out the biggie.
The top 1% get a £100bn per year housing subsidy.
But we don’t charge VAT on property rents, or food, and reduced rate on energy. Doesn’t seem to be any real logic or consistency to what we do tax.
Yes there is- those arc not taxed in an attempt to make VAT progressive