The proposal by Jacob Rees-Mogg for the Government to abandon National Insurance Contributions (NICs) rises (scheduled for April) in order to assist families facing significant price rise increases misses the point, and any changes should be part of a wholesale re-assessment of the UK tax system.
The planned rise in NICs will put additional financial pressure on those families affected and should be re-considered as increasing NICs is a very inequitable way of raising taxes. It punishes those in employment or self-employment compared to pensioners or those living off letting income. However, focusing on this single issue will have only a limited benefit to families over the coming years.
If the Government is serious about using the tax system to support hard-pressed families, it would be sensible for them to have a wholesale re-assessment of the tax system and start from scratch. The numerous inequities in the existing system need be re-evaluated and a clearer, fairer and more equitable tax structure put in place.
For example, the fact that the Government is intending to stick with the existing level of the personal allowance and the 20% tax band over the coming four years could be more significant for lower earning families than the NICs increase.
Specifically, the planned fixing of the personal allowance and tax bands for this period will inevitably result in higher taxes for everybody. For example, many people in seasonal jobs or working limited part-time hours could find themselves suddenly exceeding the £12,570 personal allowance threshold and therefore liable to income taxes over the coming years, through a process known as ‘fiscal drag.’
Similarly, many people presently paying taxes at 20% (with income up to £50,270 per annum) will move into the 40% higher tax band during the coming years simply because of wage inflation.
Indeed, for families with children where one partner is in receipt of child benefit, wage inflation could see them facing effective marginal tax rates of 60% – 70% – the exact rate will depend upon the number of children involved – on their income over the £50,270 threshold. This is because if one partner earns over £50,000, that higher-earning partner would become liable to something called the Higher Income Child Benefit Charge.
If the Government simply focuses on cancelling or postponing April’s planned increase in NICs, it will simply be a case of ‘Nero fiddling whilst Rome burned.’
Would you like to know more?
If you would like to discuss the above or how it may affect you and your business, please get in touch with Robert Salter or your usual Blick Rothenberg contact using the details on this page.
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