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Why the current tax system is unfair?

Posted: 17 May 2013 in Blog

The simple answer is that is that the current system penalises those organisations that employ people. If you employ someone you have to pay employers national insurance . This is in effect a tax on jobs. However, if you employ someone as a self-employed sub-contractor you do not have to pay this. Worse than this a sub-contractor has much less rights but is not entitled to the many of the benefits that are normally given to employees.

People assume that this national insurance somehow goes towards pensions. In fact it just goes into the general tax pot. Over £50 billion is raised through employers’ national insurance each year. This is equal to the total corporation tax paid in a year.

National Insurance payments were introduced in 1911.The idea was to provide a government safety-net for workers who fell on hard times. Employees paid money into the scheme out of their wages. Anyone needing cash for medical treatment, or because they had lost their job, could claim from the fund.

The system has changed over the years. National Insurance is now used to pay for:

  • The NHS
  • Unemployment benefit
  • Sickness and disability allowances
  • The state pension

NI is supposed to be "ring fenced" - meaning the money raised is only used for these areas and won't be spent on things like building schools or employing police officers. However, the government can borrow from the National Insurance fund to help pay for other projects.

So given the cost and lack of direct benefit it should come as no surprise that there is such a big black economy

Worse still even if your business contributes towards a pension scheme you do not get a reduction in the amount you have to pay (as was the case in the past)

So what’s the solution? In my view, as a Chartered Accountant  in a central London, SME practice, the solution is to get rid of national insurance.  This will create and added benefit for business to directly employ people.  

To compensate for the lower national insurance a better pension regime needs to be developed that encourages people to save for their own retirement rather than relying on the state. The level of contributions by a business to a pension scheme will need to should be increased.

Of course the government cannot just give businesses and business owners a £50 billion tax cut. This money will have to be recouped in other ways. Firstly the cut in NI will increase business profits – 20% will be regained through higher corporation tax payments.   For the balance I would propose the following:

  • Increase in the rate of corporation tax by 3%-5%
  • Removal of lower tax rate on dividends
  • Increase self-employed NI rate to same level as the employee rate

The taxing of dividends at a lower rate than salaries always seemed strange to me as it creates a 2-tier system that penalises business owners and managers that are not shareholders. Making the tax equal for both self-employed, partnerships and companies will make the tax system more transparent and create a level playing field.

Taxing employment seems the worst alternative of all the choices. Whichever way we go there will be tough choices to make. Whilst the government has gone some way to rectify it by the proposed £2000 allowance as from the 2014-15 tax year it needs to go further and remove this tax altogether
 

However, if you don’t agree with me here are some alternatives from the Guardian newspaper as to how the government could raise this money.

If you would like to know how your tax position could be improved then contact me.   

 

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Tax Rates

Income tax2013-142014-15
Tax-free personal allowance (under 65)£9,440£10,000
Basic rate: 20%£0 - £32,010£0 - £31,865

Higher rate: 40%(dividends: 32.5%)

£32,011 - £150,000

£31,866  - £150,000

Additional rate: (dividends: 42.5%)

Over £150,000

(45%)

Over £150,000

(45%)

Capital Gains2013-142014-15
Annual Exempt Amounts for individuals£10,900£11,000
Corporation tax (rates for financial years starting on 1st April)20142015
First £300,00020%20%

Next £1,200,000

23.75%21.25%
Over £1,500,00023%21%

Tax credit on dividends (basic rate taxpayer)

10%10%
Approved HMRC mileage ratesFirst 10,000 business miles in the tax yearEach business mile over 10,000 in the tax year
Cars & vans45p25p

Motor cycles

24p24p
Bicycles20p20p

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