Tax break imminent for those on high earnings?

[Rupert_Baehr]

This has been posted before, but it's still valid:

 

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.

 

If they paid their bill the way we pay our taxes, it would go something like this:

 

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7.

The eighth would pay £12.

The ninth would pay £18.

And the tenth man (the richest) would pay £59.

 

So, that's what they decided to do.

 

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem.

 

"Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20.”

 

Drinks for the ten men would now cost just £80.

 

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected and they would still drink for free.

 

But what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share?

 

They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free, but the fifth and sixth man would each end up actually being paid to drink their beer.

 

So the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage.

 

They decided to follow the principle of the tax system they had been using and he, the bar owner, proceeded to work out the amounts that each man should now pay as follows:

 

The fifth man, like the first four men, now paid nothing (a 100% saving).

The sixth man now paid £2 instead of £3 (a 33% saving).

The seventh man now paid £5 instead of £7 (a 28% saving).

The eighth man now paid £9 instead of £12 (a 25% saving).

The ninth man now paid £14 instead of £18 (a 22% saving).

And the tenth man now paid £49 instead of £59 (a 16% saving).

 

Each of the last six was better off than before with the first four continuing to drink for free.

 

But once outside the bar, the men began to compare their savings.

 

"I only got £1 out of the £20 saving," declared the sixth man and he pointed to the tenth man, "but he got £10!"

 

"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"

 

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"

 

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

 

So the nine men surrounded the tenth man and beat him up.

 

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him.

 

But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!

 

And that, boys and girls, journalists and government ministers, is how our tax system works.

 

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.

 

Tax them too much, attack them for being wealthy and they just might not show up anymore.

 

In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

[Cyclone]

You can't be 'guilty' of tax avoidance, because tax avoidance is legal and there is no guilt associated with performing a lawful act.

You can be guilty of eating too much chocolate. It's a word that has more than just a legal meaning.

 

As far as 'unintended use' of legislation goes, if the law is inadequate, then it is up to Parliament to make laws which are adequate.

I agree.

I've asked for examples twice, the first time I was answered with things like starting a company and having a pension, things that are possible for all of us and so are irrelevent in the context of this discussion. Then taxman explained what HMRC considers to be avoidance and I asked again. So far nobody has provided an example of something that HMRC would call avoidance.

That is, after all, what they are paid to do. If Parliament is unhappy with the law, Parliament should change it. If the public (or sufficient numbers of the public) are unhappy with the laws passed by parliament, then the public should change parliament. - Or at least petition the members and ask them to do what they are paid to do.

 

As Lord Denning said many years ago: "There is nothing in the law of England which requires any man to arrange his finances in such a manner as would enable the Inland Revenue to take the largest portion."

Which was the point I was trying to make to I1L2T3, since he seemed to think that arranging your finances to minimise your tax was somehow immoral, despite having a pension himself where he avoids paying some income tax.

You are indeed avoiding tax by SORNing a vehicle. - Many people don't bother to do so, but that's up to them. Many people are too lazy to find out what they can do and even when they know what they can do, are too lazy to do it.

No more avoiding than you avoid paying VAT by not buying something or you avoid VED by not owning a vehicle. That isn't what HMRC or even the public in general mean by avoidance.

 

As for additional liabilities on Building society investments for high-rate taxpayers - you may want to check that one out with your professional advisors. I've no doubt that the government does lose money from high-rate taxpayers who invest in fixed-rate tax schemes (like those offered by building societies) but then again, it also makes money from less-astute people who are not liable to pay tax, yet save money in Building Societies and pay the fixed-rate tax.

 

The law is clear, if you are a higher rate tax payer and earn interest on an account that is taxed at the lower rate, you owe the difference. It's probably never chased up with PAYE employees, but if you fill in a tax return it will be taken into account (indeed my accountants require me to detail what interest I've earned in a year and whether or not it's taxed), it's then recorded as income and my tax is calculated on my gross income (taking into account interest already paid).

[I1L2T3]

This has been posted before, but it's still valid:

 

Suppose that once a week, ten men go out for beer and the bill for all ten comes to £100.

 

If they paid their bill the way we pay our taxes, it would go something like this:

 

The first four men (the poorest) would pay nothing.

The fifth would pay £1.

The sixth would pay £3.

The seventh would pay £7.

The eighth would pay £12.

The ninth would pay £18.

And the tenth man (the richest) would pay £59.

 

So, that's what they decided to do.

 

The ten men drank in the bar every week and seemed quite happy with the arrangement until, one day, the owner caused them a little problem.

 

"Since you are all such good customers," he said, "I'm going to reduce the cost of your weekly beer by £20.”

 

Drinks for the ten men would now cost just £80.

 

The group still wanted to pay their bill the way we pay our taxes, so the first four men were unaffected and they would still drink for free.

 

But what about the other six men? The paying customers? How could they divide the £20 windfall so that everyone would get his fair share?

 

They realized that £20 divided by six is £3.33 but if they subtracted that from everybody's share then not only would the first four men still be drinking for free, but the fifth and sixth man would each end up actually being paid to drink their beer.

 

So the bar owner suggested that it would be fairer to reduce each man's bill by a higher percentage.

 

They decided to follow the principle of the tax system they had been using and he, the bar owner, proceeded to work out the amounts that each man should now pay as follows:

 

The fifth man, like the first four men, now paid nothing (a 100% saving).

The sixth man now paid £2 instead of £3 (a 33% saving).

The seventh man now paid £5 instead of £7 (a 28% saving).

The eighth man now paid £9 instead of £12 (a 25% saving).

The ninth man now paid £14 instead of £18 (a 22% saving).

And the tenth man now paid £49 instead of £59 (a 16% saving).

 

Each of the last six was better off than before with the first four continuing to drink for free.

 

But once outside the bar, the men began to compare their savings.

 

"I only got £1 out of the £20 saving," declared the sixth man and he pointed to the tenth man, "but he got £10!"

 

"Yeah, that's right," exclaimed the fifth man. "I only saved a £1 too. It's unfair that he got ten times more benefit than me!"

 

"That's true!" shouted the seventh man. "Why should he get £10 back, when I only got £2? The wealthy get all the breaks!"

 

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

 

So the nine men surrounded the tenth man and beat him up.

 

The next week the tenth man didn't show up for drinks, so the nine sat down and had their beers without him.

 

But when it came time to pay the bill, they discovered something important - they didn't have enough money between all of them to pay for even half of the bill!

 

And that, boys and girls, journalists and government ministers, is how our tax system works.

 

The people who already pay the highest taxes will naturally get the most benefit from a tax reduction.

 

Tax them too much, attack them for being wealthy and they just might not show up anymore.

 

In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

 

It's a strawman argument unfortunately. And in the context of comtemporary Britain the example ignores how people became wealthy in the first place. I know it's not popular with certain people but a lot of it is ill-gotten, and I use that term in the loosest sense not necessarily implying illegality. The banking sector is just one example - many of them should be banged up inside by now.

[Cyclone]

The strawman here is that we aren't talking about wealth, we're talking about income.

 

Having a high income is no guarantee that you are wealthy, nor is being wealthy a guarantee that you have a high income.

 

So the question is about people earning more than 150k/annum, not about wealthy people, and so your assertion about how people became wealthy (whether true or not) is not relevant.

[Mecky]

The strawman here is that we aren't talking about wealth, we're talking about income.

 

Having a high income is no guarantee that you are wealthy, nor is being wealthy a guarantee that you have a high income.

 

So the question is about people earning more than 150k/annum, not about wealthy people, and so your assertion about how people became wealthy (whether true or not) is not relevant.

 

 

What's it matter to you anyway?

[I1L2T3]

You can be guilty of eating too much chocolate. It's a word that has more than just a legal meaning.

I agree.

I've asked for examples twice, the first time I was answered with things like starting a company and having a pension, things that are possible for all of us and so are irrelevent in the context of this discussion. Then taxman explained what HMRC considers to be avoidance and I asked again. So far nobody has provided an example of something that HMRC would call avoidance.

Which was the point I was trying to make to I1L2T3, since he seemed to think that arranging your finances to minimise your tax was somehow immoral, despite having a pension himself where he avoids paying some income tax.

No more avoiding than you avoid paying VAT by not buying something or you avoid VED by not owning a vehicle. That isn't what HMRC or even the public in general mean by avoidance.

 

The law is clear, if you are a higher rate tax payer and earn interest on an account that is taxed at the lower rate, you owe the difference. It's probably never chased up with PAYE employees, but if you fill in a tax return it will be taken into account (indeed my accountants require me to detail what interest I've earned in a year and whether or not it's taxed), it's then recorded as income and my tax is calculated on my gross income (taking into account interest already paid).

 

Steady on sister, I'm not saying that all tax avoidance is immoral. Some of it is virtuous, intended to boost activity in certain economic sectors, boost levels of savings etc... I said this earlier in the thread. Some avoidance is most certainly not virtuous and which is why the HMRC have a unit to assess disclosure, monitor compliance and identify cases of non-disclosure.

 

My corporate pension - I pay the minimum I can without opting out because I'm not convinced it will pay out. I've got decades to go on it.

 

I've stated earlier in the thread that I beleive people should pay in income tax what their tax banding says they should. Employed or self-employed this is eminently possible. Nobody should pretend it isn't. The reasons for this I stated earlier - services, social contract etc... Remember, we're all in it together;)

 

As for immoral tax avoidance. One quite damning example which I'm sure some of the protagonists in this thread are guilty of. Ok, contractor C. has structured his business as a limited company. He gets paid £150k a year for his services but contractor C. pays himself a low wage. The low wage means, for argument sake the minimum wage, means he could pay approx £1k in income tax per year. In employment the £150k wage would lead to income tax of perhaps £50k. Contractor C. pays himself the rest of the money as dividends, drip-fed when the conditions are favourable. He might even pay dividends to other family members. Anyway, he's quids in. Lots of tax avoided. But contractor C. still wants to use state-provided services. He still uses the NHS. He wants his kids to go to the best state schools etc.... but he doesn't want to pay for it - he expects everybody else including people on low incomes who can't avoid much tax to subsidise his use of public services. IMO pretty shameful. Other people on the forum can make up their own minds. I fully expect the likes of Cyclone to try and pick this apart by pointing out minor technical inaccuracies but the thrust of it is correct - this is how some people manage to avoid a lot of their tax.

[Cyclone]

What's it matter to you anyway?

 

About as much as it matters to I1L2T3 or Rupert I expect.

 

Did you want to contribute are you just trying to cause an argument?

[I1L2T3]

The rules (laws) didn't just 'come out' - They were passed by Parliament.

 

Why didn't Parliament realise that the laws were flawed when they passed them?

 

You're not suggesting that the people who make the laws in the UK are incompetent, are you?

 

Many laws have unintended consequences. In tax land these often become known loopholes. And yes parliament and HMRC (IMO not enough, especially for corporates) do put some effort into identifying and closing them.

[I1L2T3]

The strawman here is that we aren't talking about wealth, we're talking about income.

 

In the context of the 50p cut it's relevant to both. You can kid yourself it's all about the people on around £150k. Naive in the extreme.

[Cyclone]

Steady on sister, I'm not saying that all tax avoidance is immoral. Some of it is virtuous, intended to boost activity in certain economic sectors, boost levels of savings etc... I said this earlier in the thread. Some avoidance is most certainly not virtuous and which is why the HMRC have a unit to assess disclosure, monitor compliance and identify cases of non-disclosure.

 

My corporate pension - I pay the minimum I can without opting out because I'm not convinced it will pay out. I've got decades to go on it.

 

I've stated earlier in the thread that I beleive people should pay in income tax what their tax banding says they should. Employed or self-employed this is eminently possible.

If you contribute to a pension at all then you don't do this. Why not opt out and pay what you think you should...

Nobody should pretend it isn't.

Nobody is pretending it isn't possible, I'm saying that if you can pay less then you'd be an idiot to deliberately arrange your finances in order to pay more.

The reasons for this I stated earlier - services, social contract etc... Remember, we're all in it together;)

But we don't all pay an equal amount do we. You pay far more than someone earning the average wage, as do I.

 

As for immoral tax avoidance. One quite damning example which I'm sure some of the protagonists in this thread are guilty of. Ok, contractor C. has structured his business as a limited company. He gets paid £150k a year for his services but contractor C. pays himself a low wage. The low wage means, for argument sake the minimum wage, means he could pay approx £1k in income tax per year. In employment the £150k wage would lead to income tax of perhaps £50k. Contractor C. pays himself the rest of the money as dividends, drip-fed when the conditions are favourable. He might even pay dividends to other family members. Anyway, he's quids in.

You're ignoring the fact that dividends come from profit which is taxed at the corporation tax rate.

Lots of tax avoided. But contractor C. still wants to use state-provided services. He still uses the NHS. He wants his kids to go to the best state schools etc.... but he doesn't want to pay for it - he expects everybody else including people on low incomes who can't avoid much tax to subsidise his use of public services. IMO pretty shameful. Other people on the forum can make up their own minds. I fully expect the likes of Cyclone to try and pick this apart by pointing out minor technical inaccuracies but the thrust of it is correct - this is how some people manage to avoid a lot of their tax.

 

I'll quite happily say that I do exactly what you just described (less than minimum wage though, as a director that's legal). And I probably still pay more tax than 90% of the population (in fact I know I do).

 

There is no technical inaccuracy, but what you're basically saying is that it's immoral to own a business and be paid in dividends. Something the government clearly doesn't agree with, nor I expect do most of the people who own any portion of a company and receive dividends from them... Which incidentally happens to include you via your pension scheme.