December, 2012

The Top 5 Ways Your Tax Will Change in 2013

If you’re a UK taxpayer, you can expect to see your tax bill change in 2013. Changes to your personal allowance, child benefit and the rates of income tax all come into force in 2013, altering the amount of tax paid by millions of people.

If you want to know how your tax will change in 2013, keep reading.

Your personal allowance will go up

One of the Government’s main commitments has been to ensure that no-one pays tax on the first £10,000 of their income. To do this, they have gradually been increasing your Personal Allowance – the amount of money you are able to earn before you start paying tax.

From April 6, 2013, if you are aged under 65, your personal allowance will be set at £9,205. This represents a £1,100 rise on the previous tax year. It means that you don’t pay any tax on the first £9,205 of your income.

The top tax rate will fall

For the 2013/14 tax year, the three main rates of income tax will be:

  • The basic rate of 20 per cent (no change)
  • The higher rate of 40 per cent (no change)
  • The additional rate of 45 per cent (reduced from 50 per cent in 2012/13)

This means that if you pay the additional rate of tax, you will see the rate of tax you pay fall from 50 per cent to 45 per cent from April 6, 2013.

You won’t get an age related increase to your personal allowance

From 2013/14, your age-related personal allowances will not be increased. You will only be eligible for an age-related personal allowance if:

  • You were born on or before 5 April 1948 (for the £10,500 allowance)
  • You were born on or before 5 April 1938 (for the £10,660 allowance)

If you were born on or after 6 April 1948, you will be entitled to the personal allowance of £9,205 for 2013/14.

You’ll start paying higher rate tax sooner

In the 2011/12 tax year the basic rate limit was reduced by £2,400 to £35,000. This meant that the higher rate of tax (40 per cent) was applicable to taxable income over £35,000.

 

For the 2012/13 tax year, the basic rate limit was further reduced by £630. And, in 2013/14, the basic rate limit will be reduced by £2,125 to £32,245.

This means that you start paying the higher rate of tax (40 per cent) on any taxable income you earn over £32,245.

You may start paying tax on your Child Benefit

Is you or your partner’s individual adjusted net income over £50,000 per year, and do you receive child benefit? If the answer to both these questions is ‘yes’, from 2013 you will have to declare this Child Benefit. For most people this will be done through filling in a Self Assessment tax return.

This change comes into force on 7 January 2013.

Alternatively, you can tell the Child Benefit Office that you want to stop receiving Child Benefit payments. In this case you won’t be liable for the new tax charge.

Should you give up your Frappuccino? Tax avoidance in the UK

Before we go any further, I’ll have to say that I’ve never had a Frappuccino; or for that matter anything sold by Starbucks that is not a straight forward Espresso. For me Starbucks is the absolutely last option – I visit their coffee shops only when there is nothing else and I am really desperate. In 2012, I believe I went to Starbucks once and this was in Santiago, Chile – there was no other coffee shop in sight, you see.

This, however, is not about the quality of their coffee but the news item that hit the headlines about a month ago: Starbucks being the second largest global restaurant or coffee chain after McDonalds (don’t even get me started on the food that this one serves) and having operated in the UK since 1998 through 735 outlets has paid only £8.6 million in taxes (mainly because some deductions were not recognised). And you know what?

We in the UK have bought from Starbucks stuff worth over £3 billion ($4.8 billion) during this time.

This is what makes the headlines; and Starbucks are by far not an isolated case. Companies have been ‘named and shamed’ for tax avoidance in the UK with alarming regularity and frequency. There have been reports about other large multinationals like Facebook, Google, Apple and Vodafone ; then, of course there are also Boots and IKEA (though we should probably let Swedish people worry about the last one). The practice of tax avoidance seems to be rife; so should we care?

 

Anecdotally, existing reactions seem to fit between boycotting the companies and showing complete lack of interest. I have friends who over the years have stopped using Facebook, don’t shop any longer on Amazon (and all companies associated with it) and their shadows don’t darken the threshold of Boots. Which is a pity because, Facebook aside, by doing this their lives are gradually becoming unnecessary harder – they live in the country and having their books and movies delivered was rather handy.

Also, the other day I was listening to a programme on the radio and heard some random interviews with people regarding their reactions to Starbucks paying very little tax in the UK during the last 14 years. Whilst some people heroically stopped their daily visits to Starbucks (which is not good for your health or your wallet, btw) as a form of protest, others were very open about the fact that ‘they don’t give two monkeys’ about whether or not the chain pays tax in the UK or not.

So, let me put forward two kinds of arguments here: a) that we should care; and b) that it shouldn’t concern us. After that I’ll get back to the matter of whether you should give up your Frappuccino.

We should care

It seems to me that each and every one of us should care that large multinationals are avoiding corporation tax in the UK for pragmatic and ethical reasons.

Let’s discuss the pragmatic reasons first. Naturally, these are about money. Now, most, if not all, of the money that the government has comes from taxes. Data show that in the UK the highest proportion of the budget comes from income tax (29%), followed by national insurance (NI, 19%) and value added tax (VAT; 15%). Forth on this list is corporation tax – it constitutes about 9% of all taxes and is in the region of £50 billion.

Taxes feed the budget and pay for health, education, the universities (decreasing proportion), defence and infrastructure; not to mention the welfare state which is, I believe, one of the greatest achievements of the 20th century. It works a bit like your ‘home economics’, really – the more you bring in, the more you could spend on the services and goods you need. This, of course is assuming that governments don’t waste the money raised through taxation (which may be an assumption too far but this is a different matter).

Hence, corporations avoiding paying tax in the UK affects us directly by reducing ‘the income’ of government and how much it can spend on health, education, defence and the infrastructure. Relatively, the amounts may seem trivial but Vodafone arguably avoided paying over £6 billion in tax; can you imagine what this amount of money could have done for the nearly broke health service?

Moving to the ethical, we should care because not paying tax is wrong! As simple as that! This is not only a matter of law; there is basic human decency and responsibility involved as well.

Companies not paying tax in the UK shouldn’t concern us

I believe that there are three reasons why this shouldn’t concern us: a) tax avoidance is inherent to running a business; b) these companies contribute to the UK economy; and c) no law has been broken.

Running a business, a prosperous one, is about maximising profits and this goes hand in hand with minimising expenditure. Hence, avoiding tax is at the core of running a successful business. I may disagree on many issues with Boris Johnson but he nailed it when he said ‘I cannot exactly blame the finance directors of these companies for doing their job…their salaries and livings depend on minimising tax…’. Tax avoidance is part of the business!

Second, these companies may have succumbed to tax avoidance but they do contribute to the UK economy: they provide jobs thus saving on social security and increasing the income tax part of the budget.

And third, as Starbucks rightly pointed put when accused no law has been broken or regulation breached. These companies do act within the law.

How about this Frappuccino then?

The jury is out on the relative damaging effects that tax avoidance by large corporation has on the UK economy and our lives. What is important is that tax avoidance is ‘natural’ for any company aiming to maximise profits and the UK regulation allows such behaviour.

Giving up your Frappuccino is directed at the wrong party and is bound to have limited effect. It would be better to put pressure on the government to revisit the relevant regulation rather than attack companies and people who were doing their job; and doing it well.

I still think you should give up your Frappuccino but not to boycott tax avoidance! You should give it up to assert your good taste in coffee.

 

Child Benefit and the competence of government

Child Benefit FormLast Wednesday, George Osborne, the Chancellor of the Exchequer, presented his “Autumn Statement” to parliament. He is probably quite pleased with its reception, blaming the Eurozone and managing to get one over Ed Balls in one day. This is much better than the reception he got last year when he introduced the idea that Child Benefit would be withdrawn where one parent is on higher rate tax.

Now this was particularly stupid because it broke two cardinal rules of taxation – first that an individual’s tax affairs are private and second that you shouldn’t be taxed on money you haven’t received. It was also discriminatory because the benefit is usually paid to the mother on behalf of the child and was a small cushion of comfort to her – womens’ groups have understandably complained.

Consider the case of an estranged or divorced couple with a child where the lower earner (the mother, say) is on basic rate but the other is on higher rate. This means that Child Benefit would be withdrawn but either that the mother would be aware of this and therefore of the father’s income bracket or, if the benefit was in fact paid to the mother, the clawback would be applied to the father when he had not received the money. It is not difficult to construct all sorts of scenarios where bitterness and accusation would make a bad situation worse because money is a common conflict in such situations.

This is of course apart from the iniquity that two parents just below the high rate threshold would still receive Child Benefit but if one parent only worked and earned just £1 over the threshold, there would be a substantial loss of income to the family unit. Some commentators consider it to be illegal under European law where one parent was a migrant worker, a view rejected by the Treasury but then it would, wouldn’t it?

We know a number of people with 4 children and with such a brood it is entirely likely that one of the parents is in fact at home full time. I think in all these cases the earning parent will be on higher rate tax – they would probably need to be – and losing their Child Benefit would have been massive taxation.

Child in a tunnelIn the event, Osborne relented a little by changing the levels in the budget so that Child Benefit would be withdrawn progressively where one parent had income between £50k and £60k rather than a cliff-edge when the parent tripped over the higher rate tax threshold. In this income range, there is an effective tax rate not of 42% (the standard higher rate plus the NI) but, for families with 4 children, of 73.5%. Do the sums if you don’t believe me.

For different numbers of children, families will be taxed at the following marginal rates (including 2% National Insurance applicable to higher rate taxpayers) if one parent earns between £50k and £60k:

 

Number of children 1 2 3 4 5 6 7 8 9 10
Marginal tax rate % 52.6 59.5 66.5 73.5 80.4 87.4 94.4 101.3 108.3 115.3

Yes, those careless enough to have 8 or more children will be taxed at over 100% – they will take home less for every extra pound they earn! Now I don’t know how many families this is and it is impossible to extract immediately from the Office of  National Statistics website. But even with 2 children the marginal tax rate is 60% and remember the stink about 83% tax in the 1970s? Some members of the coalition are being sniffy about President Hollande’s 75% top rate in France. Do I smell the whiff of hypocrisy?

Now to the implementation. Child Benefit is due to be changed with effect from January 7th 2013 and forms have been sent in October to all claimants. If neither parent earns more than £50k, then there should be nothing to do – ignore the form completely. If one parent earns more than £60k and does not want to fill out a Self-Assessment form, the clear option is to own up and stop receiving the benefit.

If one parent earns between £50k and £60k and wants to continue to receive Child Benefit, they will need to register for Self Assessment – there is a warning of penalties if you don’t, although it is not clear what they wil be. And the opportunity to fill in the Self Assessment on paper has been missed so everyone will have to do it online – it was due by 6th October.

But who should register? The form, sent to the claimant, says “You will have to register for Self Assessment”. But logically it should be the one earning more than £50k. Should it be both? What if either earnings vary? What if the claimant does not know how much the other parent earns? What if earnings go down? What if both parents earn between £50k and £60k? How does HMRC calculate the clawback? It seems to me that the only option is to continue to receive it and everyone fill in Self Assessment forms to ensure you don’t lose out. Hang the cost, complication to HMRC, pointless paperwork, clawback and so on. What a way to run a country!

In a nutshell, it is a mess. It was messily thought out and messily implemented. Did no-one in the Treasury do some simple sums? Did Osborne, in his anxiety to slash every possible cost without thinking, not give it a moment’s thought? Did he ignore warnings from officials? Was he quaffing at Chequers? Or what? You can see why he gets called our part-time or work-experience Chancellor, can’t you? It’s clearly not good enough.

We grumble and moan about taxes but no-one really minds taxation that pays for services but it has to be fair, seen to be fair and efficiently administered. The withdrawl of Child Benefit meets none of these and will be resented for a long time. This will haunt George Osborne while many multinationals pay next to no Corporation Tax and avoid paying UK VAT on goods traded online in the UK by locating themselves elsewhere.

Osborne should have thought a bit more.