Despite what HM Revenue & Customs (HMRC) might tell you, tax is too taxing for most people and the system needs to change, according to a think tank report.
Too many of our tax laws are made on the hoof, with the result that the British tax code is a bulky and disjointed mess, says a new study from the Institute of Economic Affairs.
The report highlights two major problems –
- Millions of ordinary hard working families are paying tax at too high a rate
- Millions of low paid workers are discouraged from working harder because they lose too much money to the tax man
Ryan Bourne argues these two reasons make Britain’s tax system unfit for purpose and the next government should start a review aimed at simplifying tax for everyone and letting workers keep more of their income.
More than 3 million taxpayers are paying higher rate tax (40%) now than in 1990 and 5 million will be in the higher rate tax net by the end of the next parliament, says his report, because wages are rising faster than the higher rate tax threshold.
Too much tax
Bourne writes that although the higher rate tax threshold has fallen by 10% in real terms since 1979 and 43% relative to salaries, more middle earners are paying more tax.
The report has six main recommendations:
- Make tax less taxing by scrapping allowances for savings income and the personal allowance for people earning more than £100,000 a year
- Standardise income tax and national insurance thresholds as the first step towards merging them as a single tax
- Overhaul tax thresholds to encourage people to earn more by letting them keep more of their cash after tax
- Improve benefits to help working families
- Cut government spending to around a third of GDP so Whitehall needs less cash and the government can lower taxes
Professor Philip Booth, editorial and programme director at the Institute of Economic Affairs, said: “Britain’s tax system is just not up to the job any more. Tax laws are extremely complicated and difficult to understand for normal people while millions of taxpayers at all wage levels pay too much to the government.
“More people pay more tax under this government, and in the next parliament, whoever wins needs to review tax law and to make the whole process simpler for everyone.”
Download the full report – Taxing Problem: The UK’s incoherent tax system