Politics make significant UK tax rises unlikely, think tank says

Chancellor of the Exchequer Philip Hammond has been “dealt a very tricky hand” and faces a choice between maintaining his commitment to getting the UK’s public finances into a surplus by the mid-2020s and responding to pressure for increased public spending, according to the Institute for Fiscal Studies.

“It is hard to see how the chancellor can both maintain the credibility of his fiscal targets and respond effectively to the growing demands for spending,” the IFS said in an October 30 release. Hammond will present his autumn budget on November 22, setting out the government’s plans for the economy, which will be based on updated forecasts from the independent Office for Budget Responsibility.

My news story for Tax Analysts, October 31 ($)

What is your income tax rate? It should be a straightforward question, but it isn’t

MPs will debate the new Finance Bill on 11 April. Some of the most difficult measures to understand concern matters that should perhaps be the most straightforward – such as personal income tax rates.

Wherever you stand on “tax simplification”, the complexity in this area is hard to justify.

For tax year 2015/16 there were three main rates of income tax:

Basic rate 20%

Higher rate 40%

Additional rate 45%

In addition, there was a 0% starting rate for savings.

Dividends were taxed at one or more of the following rates (subject to a tax credit):

Dividend ordinary rate 10%

Dividend upper rate 32.5%

Dividend additional rate 37.5%

For tax year 2016/17 there is a new savings allowance (as well as the starting rate for savings) and a new dividend allowance.

But neither of these is really an allowance. For savings, there is effectively a new 0% band of either £1,000 or £500 or nil – depending on your tax rate. For dividends, there is a new 0% band of £5,000, and dividends in excess of that are taxed (and there is no tax credit) at:

Dividend ordinary rate 7.5%

Dividend upper rate 32.5%

Dividend additional rate 38.1%

The changes necessary to bring in the new dividend tax regime, and deal with the interaction between the various rates and bands, occupy seven pages of the Bill.

I haven’t considered here the potentially different Scottish and Welsh rates of income tax, nor national insurance contributions, nor the issue of marginal tax rates (and marginal deduction rates for those receiving tax credits or other benefits). Some of the marginal rates are very high, creating cliff-edges and perverse incentives at various levels of income.

What does this have to do with the Panama Papers? Nothing – but if you’re interested you can follow me on Twitter where I’m keeping an eye on developments, and I may say something on the blog soon.