Why is the UK Tax System so Weird

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In this video, we’re going to have a look at why there’s so much strangeness in the UK’s marginal tax rate, and why basically wherever we look in the tax system, we find weird rules and caps.

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SOURCES

Tax Policy Associates on Marginal Tax Rates

BBC News Explainer on Marginal Tax Rates

Income Tax and Personal Allowances Government Explainer

Capital Gains Tax Government Explainer
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The tax system of the UK seems especially designed to pick the pockets of the middle and upper middle classes. The 62% tax band between 100k and 125k, cleverly disguised as the "personal allowance taper" is especially egregious and is the reason I tend to go into an incoherent rage about taxes. When you factor in that you instantly lose tax-free childcare and 30 hours free childcare the moment you earn a pound over 100k (no taper at all), the effective marginal tax becomes greater than 100%, so you're actually worse off than if you earn under the threshold. That's why when my kid was in nursery, I deliberately had to contribute large sums of my pay into my pension to stay below this crucial threshold. Everyone lost out as a result of this maddening corner case - I lost out on disposable income, the government lost out on income tax revenue, and the economy lost out because that money is being saved instead of spent.

Then there's the fact that the taxation system heavily penalises families with a stay-at-home parent and a high-earning breadwinner because there's no joint assessment unlike other countries. A friend of mine is in the worst possible situation as he earns roughly 100k from consulting while his wife doesn't work. Overall they get taxed significantly more than a couple earning 50k each, and also miss out on child benefit, despite both situations having the same amount of gross income coming into the household.

Finally, other countries provide plenty of deductions that just don't exist in the UK. Things like mortgage interest or public transport commuting costs are deductible in many other European countries but not here. Why? Commuting by bus or train is an expense of doing a job, it's a publicly funded service and it encourages people to not drive which has social benefits, you shouldn't have to pay income tax on the cost of it.

ricequackers
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This is bonkers.
Paying taxes on benefits instead of just reducing the benifit paid...
That's just extra work for no reason.

faarfaar
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I'm glad someone is talking about how garbage the UK tax system is. Needs a full revamp.

lostandfound
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UK tax system is crazy, completely disincentivises working or starting businesses.

lspcie
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You’ve also missed out the loss of the free childcare hours once you reach £100k which result in a >100% marginal tax.

migsteele
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higher taxes = higher inflation = government subsides to quell inflation, The rising interest rate can surely control inflation, but won't prevent erosion of the eroding purchasing power of the bank note. I have learnt my lesson this time. The banks can't be making money off my money, while inflation eats into it. I have set aside 650k to invest in the stock market now, since that keeps up with inflation, but I don't know how to get started.

tatianastarcic
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5:40 I think this quite misleading. As stated in the previous slide, council tax is based on the value in 1991, or an estimate of what that would have been. The Southend property may be worth 321k now but that is not a band H property at all.

The message that council tax is regressive is true but this is not illustrating it properly. The main point of council tax being regressive that it isn't proportional to the property price - a small house in the north will be paying a higher percentage of the property's value in council tax than a large house in london.

jonnyb
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Weird is the wrong word.
Immoral could be the word.

ravenmad
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Only persons who benefit the overcomplicated system are accountants

davidoldboy
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At least most of our taxes are automatic rather than having to file them manually like they do in the US. But Yes the UK system should definitely be simplified from the Government Admin side and made fairer for poorer households

jackbrownio
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The other thing about the child benefit is that it based on one parent's income, meaning one parent earning 80k gets nothing but if two parents are on 59k they get the full benefit.

jonnyb
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The key term here is “tax system”. And the point is: there is none. Not only in Britain, our (Czech) one is just as weird. And the reason is: taxes are introduced and cut not as a systemic mechanism, but as a way to score political points. Basically to buy votes. Everywhere, that’s no secret…

vencik_krpo
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It also gets worse if you have a student loan as you lose another 9% over a certain threshold.

davidcarter
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To add to complexity it’s different in Scotland

caseysmith
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You missed the highest marginal tax rate which is when you’re on benefits. Getting off of benefits is made difficult by the government taking away 55% of what you earn. So the lowest income earners pay as much as people on £100k. If you add in how hard it is to go back on to benefits there’s a huge disincentive to take the risk of taking insecure work which traps people in benefits dependency.

shaneintheuk
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The UK tax system is one of the reasons why we're facing problems today.
Unfortunately, none of the politicians are focusing into making the tax system simple to understand. People talk about the lack of productivity and ambition to work even harder. How are you gonna achieve this if the tax rates are too high and too complicated.

There needs to be a complete overhaul of the tax system and keeping tax rates down.

junedhussain
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Something not mentioned here is loss of certain benefits at specific earnings, too. You mentioned the loss of the personal allowance at £100K+, but what wasn't mentioned was that going over 100k also IMMEDIATELY loses you free childcare hours and childcare contributions. This isn't just a deterrent - two working parents with a child in childcare, with one of them being a high earner, is actively WORSE OFF taking a higher pay at certain points. The only remedy is to reject any pay rises, or immediately plow any extra earnings into a SIPP, which isn't exactly hugely stimulating for the economy.

Benefits are applied at a household level, but their criteria is based on the individual. This isn't the '50s where every mum is homebound - we live in a society where both parents are EXPECTED to work, and I imagine the economy relies on this to some extent. This is the other part that doesn't make sense.

All of this wouldn't be so bad if it felt like our hard earned money was actually being used wisely - but after 14 years of Tory rule, it's been consistently spunked up the wall, and people have very little patience for it now.

thecaptain
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Combined with the recent video on land tax, this just proves that the tax system in the UK is designed to get money for the average Joe and leave alone the rich. Not surprising as the UK keeps voting in rich people with the expectation they care about poor people.

bzuidgeest
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4:49 It seems insane to me that we implement this incredibly complex set of rules, when they result in something which could be approximated by a single tax with one or two bands.

andybrice
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Companies & individuals pay Accountants hundreds of thousands for a reason.
Turning assets into expenses is a lucrative business.

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