I have just posted this video on YouTube:
The link is here in case it is needed.
The transcript is:
Why is there no national insurance on investment income in the UK?
I can't explain that. If you work for a living, and most people watching this video will probably either have worked for a living before they're retired or will be working for a living now, you pay national insurance on your earnings.
Quite a lot of national insurance, in fact. Jeremy Hunt has reduced the rate to 8 per cent for most people at present, but it's still a significant additional to your tax.
However, if you live off rent, or if you live off dividends from companies, or interest on savings, or distributions from trusts that might be made to you by your benevolent great aunt Agatha, or on capital gains that you make on the profit from sale of assets - if you live off any of those things - you won't pay national insurance, because It doesn't apply to investment earnings.
So, as a result, people who have to live off earnings from employment pay a much higher overall rate of tax than do people who live off investment income.
Now, that makes no sense at all. In fact, for decades, we tried to make sure that the reverse was true. Then employment had a more favourable tax rate than income from investment did.
But we've reversed that and in the UK now we have this amazing situation where we have a bias in the tax system towards income from wealth.
We could solve that. It would be incredibly simple. If we charge what is called an investment income surcharge on income from investments, rents, dividends, etc., and we charge it at 15%, which would provide an approximation to both the employer's and the employee's rate of national insurance, which is overall paid on earned income, then we would create a level playing field between earned and unearned income.
And those with unearned income would have to pay a lot more tax.
If it was charged on income from unearned sources in excess of £5,000 a year, excluding pensioners who would be let off this charge, then we could raise £18 billion a year to redistribute inside the UK tax system to relieve poverty or to provide the investment we need in public services.
So why don't we do it? I don't know because it would be fundamentally fair if we did.
And please accept an apology: the last slide should say £18bn and not £10bn. We are still learning how to quality check these videos.
There is more on this in the Taxing Wealth Report 2024, section 6.2.
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Hi Richard, another excellent video. There is a mismatch though between the slide you show towards the end which says £10bn could be raised through income surcharge and the £18bn you quote.
We will change – apologies
While in terms of the lost revenue 15% might be the appropriate surcharge, I suspect it would only ever be politically defensible if the surcharge was the same as the employee’s NI, i.e. 8%. It would feel wrong to the average citizen for their building society interest to be taxed at a higher rate than their salary income.
When I was in work I thought, rightly or wrongly, of employer’s NI as a tax on the employer not me with my tax being the deductions from my gross pay as it appeared on my salary slip. You could argue that a business providing dividend income has been similarly taxed before distribution via corporation tax, though that argument becomes strained in the case of rent (with the rental business being also subject to CGT on the rented property) and doesn’t work at all in the case of cash savings interest. (I have no understanding of the taxation of trusts, but I seem to remember reading it does happen).
That would still raise about £10 billion. That would be good and a step in the right direction.
I understand the principle. But out of nowhere you then say “if it was charged on income from unearned sources in excess of £5,000 a year, excluding pensioners who would be let off this charge, then we could raise” …
If you/we seek a change towards a fairer system, why make exceptions? If the pension isn’t good enough – fix it on reasoned basis. Managing processes by exception gets us to where we are?
The exemtpion is to reflect that NI is not charged on pensioners, which does make little sense in itself
“The exemtpion is to reflect that NI is not charged on pensioners, which does make little sense in itself”
If it makes little sense then why not campaign to extend NI to pensioners too and raise even more?
Because it is unlikely to be politicall plauisable and I only asked for what was credible, and which also hit the wealthiest – and this cannot be guaranteed to do that.
I imagine the current system reflects the fact that while both work and investment are needed, work can be forced while investment must be courted.
I live in France where social security contributions are paid on capital gains and dividends etc. Seems reasonable to me.
France had a revolution…..
NI was set up to fund the state pension. Clearly with both EE’s and ER’s there is an excess going in the pot. To ensure fairness I would eliminate EE’s and make the ER’s rate just enough to fund the state pension.
To make up the shortfall I would introduce a Citizen’s Tax of say, 5-6%, on ALL income (earned, unearned, gains, gifts and inheritance). To ensure fairness Dividend tax would go. This would be used (and be sold politically), in theory, like the NI fund above, to fund the NHS and Social care. It would be mandatory for all British citizens. Non-British citizens working here would also pay it and it would give them access to the NHS whilst paying it. British Citizens domiciled overseas could opt out but by doing so th y would forfeit their right (for ever) to access the NHS or social care.
We really need to do something about Brits abroad working and avoiding UK tax only to come back and rinse the NHS when they are no longer a contributor to the economy.
Sorry, but very politely, this is a far-right fantasy that is a recipe for gross injustice. I think your time here might be up.