Taxing income is the fairest way of raising money

Mike Hedges – MS for Swansea East

Taxing income should be the fairest way of raising money with the more people earn the more they pay.

Tax on income can be split into income tax, national Insurance, dividend income, including tax on income from savings and capital gains.

Everyone, in the UK gets a tax-free allowance each tax year. This means that people do not pay tax on this amount of their earnings. If someone earns less than the threshold, they will not pay any income tax.

Tax is paid on anything above the amount and the percentage paid will depend on the income level. The three income tax levels are basic rate, higher tax rate and additional tax rate at 20%, 40% and 45%, respectively.

Income tax is charged at graduated rates, with higher rates of income tax applying to higher bands of income. Tax is charged on total less certain deductions and allowances.

Everyone has a personal allowance of £12,750 and on all earnings up to that no tax is paid. From £12571 and £50,720 tax is paid at the basic rate of 20%.

Between £50,271 and £125,140 the higher rate of 40% is paid. At over £125410 an
additional rate of 45% is charged.

There are arguments for increasing the tax-free allowance and the tax bands in line with average earnings and for the additional rate to be increased.

National Insurance is another tax on income. National Insurance has to be paid by both employed and self-employed workers from 16 until they reach state pension age (currently 66) even if they are still working, they become exempt from paying National Insurance contributions.

Benefits

There is no national insurance paid on earnings below £12,570, or by people who are unemployed, or receiving benefits.

Earnings between £242 and £967 a week attracts a national Insurance payment of 8% but over £967 a week the national insurance rate is 2% and those over state pension age pay nothing no matter what they earn.

For people who are the self-employed, if profits are £6,725 or more a year, Class 2 contributions have to be paid. If profits are more than £12,570 a year, people must pay Class 4 contributions.

If profits are less than £6,725 a year nothing has to be paid but it is possible to choose to pay voluntary Class 2 contributions.

I can see no logic in having different national insurance rates for employed and self-employed people and would like to see the same rate paid by both.

Another method of payment favoured by many self-employed people is to be paid via dividends rather than taxable income and to pay tax on those dividends. No tax is paid on any dividend income that falls within the Personal Allowance, there is also a dividend allowance each year.

Tax is paid only on dividend income above the dividend allowance which in tax year 2024/25 is £500.

Dividend taxation is substantially less than income tax with a rate of 8.75% on earnings from £12,571 to £50,270, 33.75% on earnings between £50,271 and £125410 with an additional rate of 39.35% paid on earnings over £125410. Also, if the income comes from an ISA, then there is no tax to be paid.

I can see no logic for tax on dividends being different to income tax and tax on dividends should be treated as income and taxed at the appropriate income tax rate.

Whilst savings currently in ISAs should continue tax free and be able to be rolled on, apart from the help to buy ISA there is no reason to allow new ISAs to be purchased.

Finally, Capital gains tax which is a tax on the profit on the disposal of an asset at a profit. It is the gain that is taxed, not the amount of money received.

For example, if someone bought a painting for £5,000 and sold it later for £25,000, makes a gain of £20,000 (£25,000 minus £5,000). You also do not have to pay Capital Gains Tax if all gains in a year are under the tax-free allowance.

Chargeable

For a higher or additional rate taxpayer the rates are 24% on gains from residential property, 28% on gains from “carried interest” if you manage an investment fund and 20% on gains from other chargeable assets.

For basic rate taxpayers, the rate paid depends on the size of the gain, taxable income and whether the gain is from residential property or other assets.

If the gain is within the basic Income Tax band, 10% is paid on gains (or 18% on residential property and carried interest. 20% is then paid on any amount above the basic tax rate (or 24% on residential property and 28% on carried interest).

I fail to understand why capital gains is taxed differently to income. This short article does not look at ways such as non-domicile status and other ways
of reducing the taxable income but considers only the four main taxes on income.

My recommendations:

All income is taxed at the same rates as income tax and the same bands for dividend income and capital gains tax as income tax.

The current income tax bands and rates to apply to all income.

National Insurance to continue as long as people work and earn beyond the threshold.

No new ISAs except help to buy ISAs to be issued.