Wednesday, 21 May 2008

Tax doesn't have to be taxing

The well beloved advertising slogan of HMRC (HM Revenue and Customs) to remind people to file their tax returns on time.

The idea is that income tax doesn't have to be difficult to understand, the problem is that just isn't true. I've never worked anywhere other than the UK so I've never had to deal with any other tax system, but I do find it difficult to imagine how it could be more complex. In an effort to raise revenue and as a side effect simplify the tax system it was announced in the 2007 budget that the 10% (starter rate) of income tax was to be abolished. As nobody understands income tax it wasn't until the measures came into effect and those affected discovered that they were taking home less money that the furore started.

Here is how income tax in the UK works (to the best of my limited understanding anyway!). Everyone has a personal allowance (just over £5,000) on which they pay no tax. There are then several limits at which different levels of tax apply. Formerly the first £2,000 something at 10% the next £30,000 something at 22% and above that at 40%. Confused yet?

The recent changes abolished the 10% rate (also called the 10p rate); which left anyone on a low salary worse off. This paid for the reduction in the general rate of income tax from 22% to 20%. The upper level remained un-changed. So although everyone was affected by the abolition of the 10% some were affected more than others. Sounding a bit like George Orwell? All tax is equal, but some is more equal than others.

The unexpected furore, by-election defeats and back-bench rebellions forced the government to re-think it's position. It was announced that there would be an increase in the personal allowance (your salary on which you pay no tax) back dated to April. This means that on average you'll be seeing about £60 extra in your pay packet come September and £10 thereafter to the end of the year (or so the media informs me). I'm not inclined mathematically to work out if this improves the lot of those worst affected by all this tax smoke and mirrors, but I'll wager not.

It really does seem to be Robin Hood upside down, robbing the poor to give to the rich. I don't usually give tax a second thought (although given the propensity of HMRC to make calculation errors I probably should) but it is that time of year again already and I've just filed my P60 (end of tax year summary) away for safe keeping.