'The UK tax system is regressive. It penalises workers, pensioners and their families. It rewards speculators and rentiers. It favours financial speculation over the hard graft of work'

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

UK households are facing the biggest decline in their disposable incomes since the mid-1950s as energy, food and transport prices are rocketing and wages are way below the 8.2% rate of inflation. Rather than helping, the government has chosen to increase taxes by freezing the tax-free personal allowance and income tax thresholds, and by increasing the rate of national insurance.

The tax system should be used to redistribute and help the less well-off. However, the UK tax system does the opposite. It penalises workers and families, rewards rentiers and overloads the less well-off with taxes.

Let us look at how the system of income tax and capital gains works.

Recipients of earned income receive a tax free annual allowance of £12,570. A basic rate of 20% tax is paid on taxable income between £12,571 and £50,270; 40% (higher rate) on income between £50,270 and £150,000; and 45% (additional rate) on income above £150,000. In addition, national insurance is payable at the rate of 12% on annual income between £12,570 and £50,270, and now another 1.25 percentage points to support the NHS, health and social care.

Unearned income, such as capital gains arising from the sale of second homes, speculating on stock market, commodities and investments are taxed at rates ranging from 10%-28%. The recipients received a tax-free annual allowance of £12,300. No national insurance or NHS, health and social care is levied.

At first glance the system may appear to be progressive, but it is loaded against workers and favours the rich and speculators.

Let us look at the case of two individuals with identical gross annual income of £30,000. One is a worker and the second is a speculator who has generated £30,000 through clever bets.

	Worker (£s)	Speculator (£s)
Gross Income	30,000	30,000
Personal Allowance	(12570)
Capital gains allowance		(12,300)
Taxable Income	17,430	17,700
Chargeable Gain
Income tax at 20%	(3,486)
Capital Gains Tax at 10%		(1,770)
National Insurance at 13.25%	( 2,309)	NIL
Total tax and NI	( 5,795)	(1,770)
Net Income	24,205	28,230

The worker pays £4,000 more in tax and national insurance deductions and has a lower take-home pay. The beneficiaries of capital gains use the National Health Service (NHS) and social care, but pay no national insurance.  

In 2019-2020, 265,000 individuals had chargeable capital gains of £65.8bn. On this, they paid capital gains tax of £9.9bn. No national insurance was paid. An additional annual sum of £17bn could be collected by taxing capital gains at the same rates as earned income. National insurance on the same could raise another £8bn or more i.e. a total of £25bn. The rich have been handed a tax perk worth £25bn.

The government has frozen the personal allowance and the higher rate threshold for the four-year period 2022/23 to 2025/26. This measure was expected to deplete take-home pay by £1.56bn in 2022/23, rising to £8.18bn in 2025/26. The 1.25 percentage point increase in national insurance for employees and employers was forecast to raise £36bn over the next three years or £12bn a year. Yet the capital gains reform would have handed the government £25bn extra. It chose not to inconvenience its rich friends.

There is no economic difference between earned and unearned income. Both give the same purchasing power. In 1988, Conservative Chancellor Nigel Lawson aligned the capital gains and income tax rates and said that there is “little economic difference between income and capital gains”.  However, subsequent Chancellors reintroduced the differential rates. The tax avoidance industry has crafted numerous schemes to enable the rich to convert their earned incomes to capital gains and dodge taxes.

The progressive elements of the tax system are diluted with a variety of tax reliefs, which mainly benefit a select few. Some 1,140 tax reliefs worth £480.2bn are handed to the well-off because they demand it.

The rich are the main beneficiaries of the tax relief on pension contributions to approved schemes. Pension contributions tax relief in 2020/21 is around £42.7bn and most of it is given to individuals paying income tax at the marginal rates of 40% and 45%. The value of tax relief on £100 of eligible pension contribution to a basic rate taxpayer is only £20, half of the value to someone paying tax at the marginal of 40%. By restricting tax relief at the rate of 20% (basic rate of income tax) to everyone, the government would have around £10bn leftover which can be used to redistribute.

National insurance is another example of regressive taxation. Most employees pay 13.25% of their income between £12,571and £50,270 in national insurance. Those earning above £50.270 pay only 3.25%. The net result is that the less well-off pay a higher proportion of their income in national insurance compared to high earners.

The UK tax system is regressive. It penalises workers, pensioners and their families. It rewards speculators and rentiers. It favours financial speculation over the hard graft of work. It shows that our political system is disconnected from the masses. Ministers increasingly identify with the richer classes and care little about the plight of low/middle income families.

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