We have a budget fast approaching in the UK and all we know is that our Chancellor has a deficit to plug and will be raising taxes. We don’t know which ones, but it seems likely that more messing around with the small taxes (e.g. IHT) and avoiding the hard choices on the big taxes (e.g. income tax) is on the cards.
Increasing the current tax take is not necessarily the wrong decision. As a country we are distinctly mid-table when it comes to tax as a share of national income:
Credit to Dan Neidle at Tax Policy Associates who is well worth a follow here.
Certainly we tried cutting spending and that doesn’t seem to have worked.
So if tax needs to increase, rather than looking at which taxes to amend, perhaps we would be better looking at who pays tax and who do we spend this tax on. Our entire tax and spend system was set-up at a time when the demographics of the UK were very different. As an example, and as we have said before, when the state pension age of 60 was first introduced, the average male life expectancy was just 58. So it was only designed for those poor souls unlucky enough to live beyond work.
As this chart from the excellent data team at the Financial Times shows, the retired pay one of the lowest levels of tax and the state spends by far the most tax on them. Of course these retirees will have been workers themselves once and paid tax during a working lifetime and that must be taken into account. The contract with the State is that we pay in whilst we can and take out when we no longer can. Over half of our clients are retired and they have all contributed significant tax over a working lifetime.
The UK’s more recent demographic shift has however shifted this tax give/tax spend balance, out of whack.
I remember well, sitting on a train listening to two older ladies complaining that they had paid in lots of tax to the system and were not receiving a fair amount back from their State Pension (this was pre-triple lock times). Of course it would have been correct to have leant over and pointed out that actually they paid tax to fund their parents’ state pension and that it was in fact my taxes paying their state pensions but that would have missed the point. They felt that they had contributed and earnt a right to state support.
The issue these days though is that the triple whammy of rapidly increasing life expectancy, medical advances and the state pension triple lock, mean that the average retiree is now costing much more than ever contributed.
If we think the current situation is bad however, it is about to get a whole lot worse. No UK politician of any party is being honest with the country currently about the ticking time bomb in the economy, the shrinking tax payer base compared to the expanding retiree base. It used to be the case that there were 15 taxpayers for every retiree, there is now only 4-1 and we are heading towards 3-1.
Our public finances for the next several decades just can’t pay for this. After that time? Well if we survive it, the current population bulge of baby boomers moves through these charts and passes away. Leaving a shrunken population with more normal ratios. It is worth be aware though of the financial pain that is here now and projected to get much worse.
Of course this is not just a problem for the UK but one for all mature developed economies. Japan is ahead of us and has a struggling economy, the US is not far behind us. For a deep dive on the US situation you can do no better than listen to this excellent Freakonomics Podcast Episode 638 – The Elder Swell.
All of this leads to the conclusion that we will have to, at some point, accept much higher taxes as a new normal or give up on some previously untouchable state support such as the NHS or Social Care. If you don’t want to pay more than necessary in tax, we can help with this. Increasingly though we are finding that a small but growing section of clients don’t want to pay less tax.
If you want to debate this with us from either side, please get in touch via this website. We are currently planning our clients tax pre-budget from our office in Hook and all over the UK.