Unearned income—like dividends, rents, and capital gains—escapes the tax burden workers face. In this video, I argue it's time for economic fairness and tax justice. A surcharge on unearned income, equivalent to national insurance, could raise £15 billion a year. Why are we protecting the rich when ordinary people pay more, most especially if Rachel Reeves has a so-called 'black hole' to fill?
This is the transcript:
People are saying that Rachel Reeves has a deficit of £40 billion in her budget that she's got to fill come October, when she'll stand in the House of Commons and tell us what tax increases, or not, that she proposes.
I'm not sure I agree with the £40 billion figure, but let's presume for a moment it's true.
I've already suggested that she could fill £15 billion of her deficit by simply cutting the interest that the Bank of England pays to the UK's commercial banks.
She's only got £25 billion to find. How could she do that?
Well, one very simple and very obvious thing that she could do is to create a bit more tax justice.
In the UK, people only pay national insurance on their earnings from work.
Suppose that everybody had to pay something equivalent to national insurance on all their income, wherever it came from?
Wouldn't that be fair?
Wouldn't that be reasonable?
Wouldn't that be right?
Wouldn't that be proper?
Why should it be that people who have to work for a living pay more tax as a consequence than people who live off unearned income?
It's possible that we could create that equivalent to a national insurance charge.
We had one, which existed until 1985 when Margaret Thatcher got rid of it, and it was called an investment income surcharge.
It was charged at 15% on unearned income. Now, unearned income, I would stress above a certain limit, and I would suggest that limit should now be something like maybe £5,000 a year, and you've got to have quite a lot of savings before you get to that point.
What I suggest is that the surcharge, the extra 15% income tax that a person would pay on that unearned income, to create a charge broadly equivalent to national insurance, would be payable on all forms of unearned income, like dividends, interest and rents and distributions from trusts and other such things, and I would also like to extend it to capital gains because if it wasn't, there would just be an enormous incentive for people to try to earn capital gains instead of having income paid directly to them, and so for the sake of avoiding that massive amount of tax avoidance activity that would otherwise go on, let's pop it on capital gains as well.
The consequence will be that when people declare this type of income through their self-assessment tax return, and anybody who has that level of unearned income will have to complete a self-assessment tax return, they would simply automatically have this additional tax charge added on to their bill, simply creating a level playing field between them and people who have to work for a living.
Nothing complicated about this. Nothing costly to implement. No great legislation changes required. And it could be done overnight. But what it would do is recognise that social justice is required.
There would be one change that I would suggest, one limitation that I would suggest, perhaps more correctly, and that is that this shouldn't apply to pensioners because pensioners don't pay national insurance on their earned income either. But that's a question that everybody might want to ask some things about anyway.
But let's deal with this alone.
How much would it raise? £7 billion could be raised very easily if this applied simply to unearned income. If it were extended to capital gains, I think that sum could be easily doubled.
I think we would be in the region of around £15 billion, although the numbers are subject to wide degrees of variance in estimates simply because nobody can quite predict the future, and I'm not going to claim that I can.
The point is, that's a very easy additional sum that could be raised, and it would create a level playing field in our society and overcome a quite reasonable anger that people have about why the wealthy are favoured by the tax system when those people who have to go to work are prejudiced by it.
Isn't that a necessary step towards tax justice in our country?
And isn't that something that you would want to happen because this is about creating fairness for you?
Poll
Should the UK have an investment income surcharge equivalent to national insurance on unearned income?
- Yes (93%, 199 Votes)
- No (6%, 13 Votes)
- No, because I would not want to pay it (1%, 2 Votes)
- Don't know (0%, 1 Votes)
Total Voters: 215
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Both suggestions seem like a no brainer.
its basically a tax on pensioners
Did you listen to what I said? It seems not.
You suggest not applying the surcharge to pensioners because they don’t pay NICs. I think I might go the other way.
More pensioners are continuing to work and have earned employment in retirement, past state pension age. They and more importantly their employers should should pay Class 1 NICs like other workers. Ditto class 4 NIC on self employment income like other self employed people.
I think you might be making the right choice. I should be more courageous.
This seems sensible but I have a related question.
All of this adds ever more complications to taxation and thus ever more opportunities for complicated schemes and loopholes to evade tax. I would like to simply taxation. What are the downsides of scrapping national insurance and capital gains etc and just going with adding up all your income from whatever source – employment, cap gains, interest, dividends etc – and then applying a progressive tax rate to the lot?
I’m sure there must be downsides or somebody would’ve already done it!
No, this eliminates a loophole.
I would have it apply to pensioners, too. (And I am one.)
After all, the contributions into our pension schemes were tax-deductible.
On the other hand, ISA contributions are made from taxed income, so the withdrawals from ISAs could continue to be tax free (which also means no messing around trying to distinguish capital gains and accumulated income inside the ISA, or any other complications. Tax and benefits is already grossly over-complex, imho.) Your proposal about the investments permitted for ISAs could still apply.
BUT… the basic tax free allowance could be raised significantly; AND the basic pension also raised (and all the fiddling about with means-tested benefits like winter fuel allowances and so on also ended – except in cases of people with seriously inadequate pensions such as some widows – since the basic pension would (should) cover ‘the basics’).
Your proposal to cut the tax allowance on pension contributions to just the basic rate would then be ‘icing on the cake’ (in a negative sense: the high earners would lose their current thick layer of 40% icing). That wouldn’t be retrospective, of course; so those now drawing down on their SIPPs etc wouldn’t be affected unless they have some scheme going on such as one SIPP in drawdown and another still vesting.
I agree and disagree with parts of this. See the Taxing Wealth Report 2024.
‘Why are we protecting the rich when ordinary people pay more, most especially if Rachel Reeves has a so-called ‘black hole’ to fill?’
The first question is the only one we really need to ask, ‘Why are we protecting the rich?’
Most of us get nowhere the wealth of the very wealthy so why society politically and economically and even socially is focussed on them beats me. I guess that many on here or even those who read without comment are angered by how power, influence and most institutions seem intertwined with powerful people. Prince William the patron of a homeless charity, the late Duke of Edinburgh the head or patron of the World Wildlife Fund when he was noted for shooting things. That is certainly a part of it. Wealthy people being patrons of such things particularly charities for the poor is something I have always questioned. I know it’s a small thing but there it is.
There is also this heavily promoted idea that it’s an either/or argument, in that it’s either neoliberal economics or extreme left wing economics, whatever that amounts to. The way things have gone I even feel some fondness for Tony Blair and I’m only half joking! Honestly.
There’s no reason why we or any non wealthy or even wealthy person should protect the wealthy, but then most of us actually don’t, that’s largely the preserve of politicians and the msm. The rich control most of the msm and the vast majority of politicians and many kinds of gatekeeper are in the pockets of the rich. Starmer and the LP are a major disappointment in this respect, who could really trust a politician after the antics of Johnson and the blatant lying of Starmer, who is either a stooge or a ditherer seemingly continually caught in the headlights whenever he appears. My view is that he was put into the LP to destroy it or make it just another vehicle for big finance and the establishment. Nothing he’s done has yet to disavow me of that view. But he and mates won’t care, will they? They can screw the majority of us over leaving chaos and poverty in their wake whilst they sail off into a golden sunset.
Disgusting, disappointing but not surprising really.
But in spite of all that, more people now than ever before are demanding a more fairer playing field and that starts with a fairer redistribution of wealth.
It’s a really sensible idea, but sadly I really can’t see Rachel Reeves looking at it. She doesn’t seem to want to touch anything that affects the better off and only seems to want to attack the less well off and the vulnerable.
Yet another of your “popular, fair, & easy to implement quickly with minimum parliamentary effort” proposals.
But it will adversely affect those with wealth by subjecting them to fairer redistributive taxation.
So LINO will hate it as it will upset their donors & future employers.
I think Rachel & Keir would prefer a 15% “Welfare Payment Deduction” across all DWP payouts.
I agree completely that National Insurance is part of tax, and that tax rates (including NI if applicable) should be equivalent across all sources of income.
Just a couple of comments, which are things which would have to be resolved. Interest rates are something outside the saver’s control – I cannot be the only person who found an amount of savings that previously attracted no tax suddenly creating problems a few years ago as interest rates went up. It is possible that any threshold ought to be defined differently.
And the absence of NI for pensioners (and I have a direct interest as a pensioner myself) seems at one level inequitable – while at the same time it would seem wrong to undermine people’s planning for retirement at a point when they can no longer change those plans.
I don’t know what the answer to the latter problem is. In a perfect world I would recognise that NI is in fact a tax, decide it is a flat tax at the 2% it is charged at higher income rates and adjust other tax rates to create the same overall tax rate. Indeed – while realising it would be politically impossible – I would return to it being applied to incomes lower than the normal tax threshold so that almost everyone becomes part of the contractual relationship with the government to pay their dues while benefitting from public expenditure. But that would still raise pensioner tax enough to cause some people difficulties.
I am interested that you think lowering the threshold to create a tax relationship is important.I used to say that. I have long abandoned it because on balance I think a higher threshold works, but you have reawakened my awareness of the issue.
Time we brought back the investment income surcharge then in my view!
Would it also get rid of the anomaly where those earning more than £50,000 only pay 2% NI?
This would have no such cap.
I’ve been arguing for this as a principle even since before I retired in 2015. We pensioners are the most likely, as a group, to need the NHS. I’m not excused from car insurance just because I am not working. We should pay a contribution, subject to the Pension Credit means test perhaps, which would mean only those with non-State retirement income would be called upon.
A universal healthcare system should be universally “funded”.
Excellent succinct video, great idea to show how easily taxation could be made fairer using our existing system.
I agree with this. I think it is no longer feasible to restrict the funding of the welfare state to taxing a diminishing and overburdened band of younger workers. It seems unfair to me that pensioners have their effective tax rate cut by a third when they retire. It would seem reasonable to me if better off pensioners had to go on paying into the health and social care system via a health and social care levy which would replace the NI contributions they gave up when they took their pension. I am such a pensioner and would be perfectly willing to pay such a tax. In fact, if it meant that I had better and quicker access to a better functioning NHS it would be in my interests to do so. There would be no need to set the tax at the same rate as NI. It would be graduated to ensure that the worst off were not affected. If it was levied at an adequate rate it could perhaps also provide insurance against care costs and so make it more acceptable to the people who have to pay it. It would be interesting to know how feasible you think this idea would be and whether the numbers stack up at all.
I agree.
I will save NIC this year when all I am is a bit older. It makes no sense.