Triple Tax Lock Is Political Spin

Triple Tax Lock Is Political Spin.

In the Conservative manifesto, David Cameron promised that there would be no increases to VAT, income tax and national insurance. The so-called "triple lock" was promised and indeed, will now be delivered as part of the Finance Bill 2015-16 (the summer budget).

Many, including the former Conservative Chancellor Nigel Lawson have criticised this move suggesting that this is pure political spin designed to win votes and offers the Treasury no room for manoeuvre to raise taxes should the country get into financial difficulty over the coming five years. The current Chancellor, George Osborne, has claimed that the "triple lock" will have little or no impact on HMRC revenue.

Hidden taxes

Many people do not realise just how much additional tax is being raised with other moves:

Pension drawdown - when you withdraw a taxable some from your pension fund you are now taxed with an emergency tax code. For example you wish to withdraw £20,000 from your pension fund. Emergency tax means that the pension company must withhold tax from this withdrawal and treat it as if you are actually taking an income of £20,000 per month. This means that only around £3000 or £4000 of this withdrawal will be taxed at 20% and the majority of the withdrawal will be taxed at 40% and 45%. This immediately swells HMRC's coffers! You may only be a basic rate taxpayer or indeed a non-taxpayer but you will still face withholding taxes of thousands of pounds and you will eventually get it back but it may take 3 to 6 months.

Dividends tax - with effect from next year new flat rate taxes are introduced to dividend income. This not only affects investors who hold shares but it affects every small business, limited company director. Previously you could declare dividends up to the higher rate tax threshold and pay no further tax as you are deemed to have paid tax because the profits from your company have already been taxed at 20%. From April 2016, basic rate taxpayers will pay an additional 7.5% dividends tax and both higher and additional rate taxpayers will pay 32.5% and 38.1% tax respectively. For the average small company director we suggest this is an additional tax of around £3000-£4000 per annum.

Buy to let tax - sneaked into the budget was the fact that the government will restrict the expenses that you offset against rental profits to only receive tax relief at 20%. If you are a higher rate taxpayer you will pay more tax.

More pension taxes - the budget also included restrictions on the amount of yearly pension contributions via an annual allowance adjustment that higher earners can pay into pensions and receive tax relief. Quite simply, if you are a higher earner you will receive less tax relief on your pensions meaning you will pay thousands of pounds in additional income taxes that you cannot reclaim each year. In addition, the lifetime allowance is also reducing meaning even more people will be caught and pay higher taxes in retirement. We suggest this is indicative of an ageing population and the fact that the Treasury will tax us more as we get older as there are less workers paying the usual income tax.

Merging income tax with national insurance - there is a consultation in progress to consider the merger of these two items so that we only pay one rate of tax. What many people do not understand is that national insurance contributions are only payable on part of your earnings at 12%. The excess over a certain limit pays only 2% national insurance. With the removal of this basic rate taxpayers face a tax bill of potentially 32% (20% income tax and 12% national insurance on some of your earnings) and for higher rate taxpayers 52% (40% income tax and 12% national insurance), but these could be payable on the whole of your earnings removing the capped contributions for national insurance by merging the two will mean we all pay more taxes on our total earnings. Stealth tax!

Comment

As you can see from the above, this is all political spin and overall we will be paying more taxes but the headline rates for VAT, income tax and national insurance remain "fixed".