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The 10p Tax Rate Has Not Been Abolished – Yet, Say Accountants

Mike Dawes, private client partner at Surrey accountants TWP Accounting LLP, reflects on the continuing fallout from the controversial scrapping of the 10p income tax band.

Despite rumours to the contrary, the 10p income tax rate is alive and well for 2008-09: the trouble is that it now only applies to dividends and savings income. It is a typical outcome of Prime Minister Brown’s micro-management of the tax system that a low income employee can now pay more tax than a non-working person with a similar level of investment income.

But this is just one of a number of anomalies in the system. For example, if the national minimum wage is intended to quantify a basic subsistence level of income, is it fair that a person working 35 hours per week will see an average 9% of their overall earnings disappear in income tax?

Or take the case of a manager earning £40,000 a year. His top rate of tax and national insurance is 31%, but if his earnings were £41,000 a year, his top rate would fall to 21%.

Confused? You will be, though possibly not so much as any unfortunate soul who had to read the explanatory notes to this year’s Finance Bill, which ran to 1,148 pages. The tax system has always been complicated and despite attempts at simplification for many years, it simply gets worse – not always, it appears, at the expense at those who best able to bear the cost. Unfortunately, there seems to be no prospect for improvement for so long as tax is used as a tool for both political purposes and for micro-managing the economy. .

As to the 10p rate, that may remain for some time to come. It was introduced by Mr Brown some years ago in a very clever move when he abolished advance corporation tax on dividends and in so doing he increased the tax revenue by billions of pounds. How did he manage that? It was quite simple really – the abolition meant that pension funds could no longer claim back tax on their dividend income.

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