Government has no major plans to move to equalise taxation of earned and unearned income

Sikka finds it unfair that a worker on £30,000 a year currently pays £3,486 in income tax and £2,092 in national insurance – a total of £5,578 – while a ‘speculator’ with £30,000 of capital gains pays no national insurance, even though he uses the NHS and social care, and pays only £1,770 in capital gains tax, said Sikka. This means that the worker pays £4,000 a year more in taxes than a speculator, he complained.

Government spokesperson Viscount Younger of Leckie was noncommittal on any change, saying the Government has acted to reduce the generous tax treatment of unearned income, including reforming the taxation of dividend income, reforming the main rates of dividend tax in 2016 and reducing the tax-free dividend allowance from £5,000 to £2,000 from 2018. Younger said the Government is committed to a ‘fair tax system’ in which those with the most contribute the most, but one which also has to encourage saving.

Lord Leigh of Hurley, Conservative, asked Younger to resist any attempts to treat gains from capital at the same rate as income. He said: “People like me, called speculators by some, started up a new business with risk capital, which is easily lost, whereas others bank an income entirely risk-free; they should not be equated. It is worth reminding the House that a mobile one per cent of taxpayers account for 30 per cent of revenues.”

Lord Forsyth of Drumlean, Conservative, called for the Government to simplify the tax system and indeed, in time, reduce the burden of tax by cutting the basic rate of income tax.

Lord Woodley, Labour, remarked that according to HMRC, most of the benefits of the lower rate of capital gains tax accrue to individuals resident in London and the south-east of England, and very little to less wealthy regions in the UK.

Baroness Janke, Lib Dem, said scrapping the cap on bankers’ bonuses is ‘unjust and unfair’ and an insult to people who are paying soaring mortgages, food and energy costs and struggling to feed their families. Defending this measure, Younger said it will help recruit the very best bankers from around the world who generate income for the UK and will pay more tax into the Treasury.

Lord Foulkes of Cumnock, Labour, asked what is being done to stop people taking up residence or setting up companies in the overseas territories and Crown dependencies. Younger replied that rules were changed on non-doms to bring an end to permanent non-dom status.

Lib Dem Lord Teverson is concerned that the UK has become a high-tax but low-service-level - in terms of public services – economy. Younger claimed ‘we aspire to be a low-tax country’.

Baroness Chakrabarti, Labour, cited the Institute for Fiscal Studies as saying, ‘we do not find any evidence that tax-motivated retention of profits translates into more investment in business capital’. Chakrabarti wondered if the present system of taxing the poorest more than the wealthiest matches the Government’s ‘conscience’. Younger replied: “It is very important to keep taxes as low as possible to help working people, so that the amount they earn goes further. Equally, it is very important to have policies in place to incentivise businesses – not just those within the UK but those which want to come and invest in the UK.”

The full session is here.

By Hamant Verma, CIOT Senior External Relations Officer