British Families Are Being Hit by Stealth Taxes
Comment of the Day

November 15 2022

Commentary by Eoin Treacy

British Families Are Being Hit by Stealth Taxes

This article from Bloomberg may be of interest to subscribers. Here is a section:

For lower-earning families unaffected by the child benefit clawback, but perhaps struggling even more, it is usually possible to transfer £1,260 of a non-working spouse’s personal income tax allowance to the working partner. This can potentially save £252 a year. Again though, this is not automatic, it must be claimed.

And these are far from the only tax anomalies. Since 2009, those earning more than £100,000 a year have had their personal income tax allowances clawed back at the rate of £1 for every £2 earned above the threshold. Worse still, the threshold has been unchanged for more than 13 years. Anyone earning £125,140 or more loses the entirety of their personal income tax allowance. 

Here again, making additional pension contributions is a good option for reducing your taxable income — and for those earning more than £100,000, it might be a more realistic option. The sweetener is that the effective tax relief for those affected can be up to 60%. For these people, the government effectively contributes £60 for every £40 they pay into their pensions.

Stealth taxes make things more complicated for everyone. Many lower-earners end up paying far more tax than necessary, or not receiving a benefit to which they might otherwise be entitled, often both.

Unfortunately, especially during periods of rapid inflation, such tax strategies are the gift that keeps on giving for governments, raising additional revenue without having to increase tax rates. .

As an old ad for Morgan Stanley once claimed, “You must pay taxes. But there’s no law that says you have to leave a tip.”

Eoin Treacy's view

I saw this chart from Eurostat yesterday and it surprised me that the European aggregate tax haul had risen so much ahead of the pandemic.
With the overwhelming spending patterns of the pandemic and the resulting inflation, there is clear need to fiscal consolidation. At present that is focusing on tax hikes but the ultimate nettle that needs to be grasped is spending cuts. That’s not just true of the UK, it’s an issue most European countries and the USA have to deal with eventually.

The NHS is the 10th biggest global employer at 1.7 million people. That’s about 5% of the working population which implies most families have someone who works in NHS. Nurses and other workers are striking at present for better pay and conditions.

When Margaret Thatcher crushed the coal miner’s union, it had fewer than 200,000 members. That option is not available in dealing with the “angels” of the NHS. It is likely they will get a better than 4% pay rise.

There is no easy answer to the crisis in affording healthcare for an aging society. The reality is the quality of care will continue to trend lower without root and branch reform and no one has the appetite to make the cuts required to achieve that.

The Pound paused today at the psychological $1.20. This is the first big area of potential resistance as it represents the lower side of the overhead trading range.
Meanwhile Gilt yields continue to contract as the outlook for inflationary pressures retreat.

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