UK Tax Hikes Push Tax Freedom Day Forward

by Robin Pilgrim, LawandTax-News.com, London

26 May 2010

UK 'Tax Freedom Day' has been set at May 30 this year, but with the coalition government’s emergency budget still to come, the Association of Chartered Certified Accountants (ACCA) warns that UK taxpayers can expect fewer days ‘free of tax.'

Tax Freedom Day, as calculated by the Adam Smith Institute (ASI), is based on the number of days in a year a UK resident will contribute their earnings to government coffers to cover government spending. This year, due to the value-added tax (VAT) increase in January, the average taxpayer pays 40.9% of their earnings, increasing the number of days to Tax Freedom Day to 149 days, three days later than in 2009.

Commenting, ACCA’s head of tax, Chas Roy-Chowdhury, said: “Tax Freedom Day has crept forward again this year, mostly on the back of the VAT rise in January. Normally, taxpayers can reduce their tax bill by taking advantage of all the tax breaks and benefits that the state offers. However, the new coalition has promised big tax changes in the months ahead, the details of which are still unclear. The detailed coalition document hasn’t significantly developed what was outlined in the initial agreement either. The formation of a coalition government has unavoidably muddied the waters on tax, which could force people to delay planning their tax matters this year.”

Tax gets a section to itself in the coalition agreement between the Liberal Democrats and Conservatives, but it’s a section light on detail:

• A “substantial” rise in the personal allowance is promised for the emergency budget (to be introduced in April 2011), but there is no detail on what a “substantial” rise is, nor exactly who will benefit;
• The parties have agreed to “seek a detailed agreement” on non-business capital gains rates, but there is no guarantee that the parties will be able to reach an agreement. The coalition deal says that capital gains rates will be “similar or close to those applied to income” but there is no precise figure or timetable given;
• Tax allowances for married couples, a key tax pledge of the Conservatives, are briefly mentioned but there is no detail on when they might be introduced; and
• While both parties are agreed that cuts will be made to Child Tax Credits for the wealthiest, there is no detail on exactly who will lose out.

Roy-Chowdhury continues:

“As well as uncertainty over the changes mentioned in the coalition document, there is also uncertainty over what isn’t mentioned once: VAT. After income tax and national insurance contributions, VAT is the 3rd biggest tax burden on UK citizens and there has been plenty of speculation that it could go up to 20% at this budget. If this happens, we may just be celebrating Tax Freedom Day a bit too soon.”

“It’s not only VAT that could go up. Add in the 50% income tax rate, possible big capital gains rates rises, and restrictions on pensions relief, and we could see Tax Freedom Day move up to two weeks into June next year.”

Despite the uncertainty around some tax issues, there are still steps taxpayers can take to legitimately lighten their tax burden, suggests ACCA. In particular, the body advocates:

• Using Individual Savings Accounts (ISAs). Taxpayers can place GBP10,200 a year in these tax-privileged investments. That’s GBP20,400 for a couple, which is free from capital gains tax or income tax;
• Claim all allowances and benefits;
• Using Gift Aid. Higher rate taxpayers can claim the difference between the higher rate of tax at 40% and the basic rate of tax at 20% on the total value to the charity of a donation; and
• Check tax codes to ensure you are not being excessively taxed;

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