In a series of videos I am exploring the ways in which the UK tax system is biased towards the wealthy, making them richer compared to everyone else, and increasing inequality as a result.
One of the ways in which this happens is the consequence of many UK tax reliefs being provided at what is called a person's marginal income tax rate. This means that if, for example, a person's highest income tax rate is 40%, then reducing their taxable income by granting them an allowance or relief will, in most cases, reduce their tax paid (whether directly or indirectly) by 40% of the amount of allowance or relief claimed. However, what this means is that in many cases those on higher income get a tax subsidy that might be double that paid to a person on average income whose marginal tax rate is only 20% when that person with the lower income should logically have a greater need for that tax subsidy. In this video I explore the resulting injustice and, as usual, suggest a remedy.
This video is one of a series. All of the videos are linked from this page on the Tax Research wiki, which is being updated as new videos are produced.
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Richard,
Worth making the point that Tax Relief is given on pensions as they are ‘deferred income’ ie you pay tax later on the income from the pension, BUT very few UK pensioners pay higher rate tax so many of those getting 40% tax relief on their ciontributions will pay 20% tax on the income generated
“…granting them an allowance or relief will, in most cases, reduce their tax paid (whether directly or indirectly) by 40% of the amount of allowance or relief claimed.”
Would you extend this idea to things like business expenses? If the logic is that the lower income person deserves more subsidy than the higher income person, wouldn’t that apply to the costs of, say, buying stock or equipment? If a plumber in a higher tax bracket buys a drill costing £100, that reduces his tax bill by £40. A lower tax bracket plumber only reduces their tax bill by £20. Is the higher tax bracket plumber getting an unfair subsidy? If not, what’s the difference and where do you draw the line?
No
That is about calculating income, not offsets against income
They are totally different things
So what you are suggesting is that if someone earning, say, £500,000 puts £40,000 into their pension they should get £8,000 tax relief?
Yes
Although at £500,000 the rules are already more complicated than that
I’m sure someone earning £500,000 would welcome your proposals. At the moment, someone earning that much and putting that much each year into their pension would only get £1,800 tax relief. The rules really aren’t complicated.
I pointed that out already – see the qualification in my previous answer
I am aware of this