Julian Knight: Life's about to become a fiscal drag for the 40 per centers

 

Thankfully, there wasn't a pasty or caravan tax in sight in last week's Autumn Statement. Instead, what we had was a tale of pretty unremitting misery, particularly if you are in danger of breaching the 40p income tax band.

For you, the next five years will be a real drag – quite literally – as you find more of your income subject to 40 per cent tax. Add to this the confused child benefit changes which come into force in a matter of weeks and you can clearly see that Ed Miliband's "squeezed middle" are at the epicentre of this austerity.

Of course it could and probably will get much worse – over in Ireland they are preparing for their sixth austerity budget having already suffered swingeing pay and benefit cuts. Before this has finally played out I'd hazard a guess that we will be talking the same here, particularly if tax receipts continue to underperform – more on that below.

For a generation or more politicians have run scared of raising the rates of income tax. Instead, chancellors raise VAT and employ fiscal drag. But I'd argue that fiscal drag is infinitely more damaging to the economy than a simple rise in income tax. It stops people from taking overtime and the self-employed from taking on projects. Logically, are you going to go the extra mile if you can see half your extra income being taken in tax and national insurance? Place more people into the 40p tax band and you destroy a key driver of the economy, more so than if you raised income tax by 1p.

Up to 400,000 people are predicted to be subject to fiscal drag as a result of the Autumn Statement. So what to do if you are one of them? Well you have to use the few scraps that have fallen from the Chancellor's table. The individual savings account limit will rise by 2.1 per cent to £11,520 in April – this is a below-inflation rise but worthwhile nevertheless. And although annual pensions allowances and the lifetime limits have been cut, take advantage of the ability to save in a pension from your pre-tax salary.

Put as much as you can afford in because if government finances deteriorate – which is possible – you may find there are cuts to pensions tax relief in future budgets.

Scapegoats

When describing the likes of Google, Starbucks and Amazon's tax affairs, most Britons would probably like to paraphrase the old wartime saying about American GIs – there are three things wrong with them: they're overpaid, under taxed and over here.

But in reality these firms are a bit of a scapegoat for much wider, fundamental failings in our tax system. The real problems are much deeper. The UK tax system is drowning. Nearly a decade ago I wrote a book on tax – the official tax manual I needed to write it was about 500 pages long, but if I was to attempt to rewrite the book today the manual I'd need would come in at more than 1,100 pages.

Politicians of all hues find it too easy to simply add another law to chase the next headline that they are getting tough without addressing the real issue, which is how to create a tax system which gets the highest number of people paying the right amount of tax.

Of course, tax authorities are trying to catch fog. In essence, money follows ideas and is no respecter of national boundaries, this means much of the governmental tax base is being eroded away. This will fundamentally change the way governments can operate – they will be much smaller for starts.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Software Developer / C# Developer

    £40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

    Neil Pavier: Management Accountant

    £45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

    Sheridan Maine: Commercial Accountant

    £45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

    Laura Norton: Project Accountant

    £50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

    Day In a Page

    Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

    Sun, sex and an anthropological study

    One academic’s summer of hell in Magaluf
    From Shakespeare to Rising Damp... to Vicious

    Frances de la Tour's 50-year triumph

    'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
    'That Whitsun, I was late getting away...'

    Ian McMillan on the Whitsun Weddings

    This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
    Kathryn Williams explores the works and influences of Sylvia Plath in a new light

    Songs from the bell jar

    Kathryn Williams explores the works and influences of Sylvia Plath
    How one man's day in high heels showed him that Cannes must change its 'no flats' policy

    One man's day in high heels

    ...showed him that Cannes must change its 'flats' policy
    Is a quiet crusade to reform executive pay bearing fruit?

    Is a quiet crusade to reform executive pay bearing fruit?

    Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
    The King David Hotel gives precious work to Palestinians - unless peace talks are on

    King David Hotel: Palestinians not included

    The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
    More people moving from Australia to New Zealand than in the other direction for first time in 24 years

    End of the Aussie brain drain

    More people moving from Australia to New Zealand than in the other direction for first time in 24 years
    Meditation is touted as a cure for mental instability but can it actually be bad for you?

    Can meditation be bad for you?

    Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
    Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

    Australia's first-ever Eurovision entrant

    Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
    Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

    Laughter, but no tears, as Letterman takes his bow after 33 years

    Veteran talkshow host steps down to plaudits from four presidents
    Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

    Hozier's 'blasphemous' song takes Novello award

    Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
    Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

    Join the tequila gold rush

    The spirit has gone from a cheap shot to a multi-billion pound product
    12 best statement wallpapers

    12 best statement wallpapers

    Make an impact and transform a room with a conversation-starting pattern
    Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

    Paul Scholes column

    Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?