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Tax Simplifier 18: The tax burden on poor people

    The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change on a regular basis. Blogs are published twice per week, on Monday and Thursday. Read David's previous blog on profit as a tax base. You can follow David on Twitter @TaxSimplifier.

    The total tax collected in the UK (including council tax and business rates) ballooned in the 10 year period from 1997/8 to 2007/8 by 75%, from £293bn to £514bn. The average council tax per dwelling in England rose from £564 to £1,101.

    Tax collected has leveled off in recent years, but the effects of these very large increases remain built into the system.

    This blog seeks to assess the impact on poorer people of the contribution to this tax total which is required from them.

    Mandy, is a fictional single lady living in Basingstoke. She works a 35 hour week as a store assistant at Aldi, which at £8.50 per hour gives her a weekly gross income of £297.50.

    Tax and NIC deductions are £23.19 plus £17.82 = £41.01p.w.  Employer NICs of £20.63 are also due.  Economists usually say that the impact of employer NICs is to reduce wages, and so in reality they are borne by the employee.

    Mandy’s council tax (Band A, with single person’s discount) is £13.01 p.w - she is not entitled to any relief from this.

    Her rent is £110p.w for about the cheapest flat in Basingstoke. Housing benefit is £4.25 leaving £105.75p.w. net.

    Her electricity is £12 p.w, including 60p VAT and reflecting, perhaps, £1.50 green taxes charged on the supplier (estimates of  the impact of green taxes vary substantially, but some go as high as 20%).

    She pays £5 p.w home insurance (including 30p insurance premium tax), £2.78 TV licence, £4.50p for water, and £7 p.w for her mobile phone (including £1.16 VAT).  She cannot afford a car, but her bus season ticket to get her to work is a major cost at £20 p.w.

    After paying these taxes and expenses Mandy is left with £86.45 p.w. for all her food, clothing, cosmetics, entertainment,etc.  Assuming that, say, £40 of this expenditure is VAT standard rated, this includes a further £6.66 p.w. VAT.

    Mandy bears a total of £84.87 p.w. tax[1]- about as much as her disposable income after paying bills. She suffers other taxes indirectly - the fuel duty paid by the bus company, the import duties paid by her supermarket etc.

    Mandy can barely make ends meet. She is not able to save for retirement, or for a rainy day,  and is always  anxious about money. Her tax bill is too high.

    Thank heaven her personal allowance has gone up significantly under the coalition government - a policy long advocated by the CPS. But ministers should bear people like Mandy in mind every time they consider the funding some new Government programme.



    [1] nb the precise definition of “tax” can be controversial - the above figure is made up from 41.01 +20.63 +13.01+0.60+1.50+0.30+1.16+6.66

    David Martin enjoyed a career spanning 23 years as a tax lawyer within a large City Law Firm, latterly as Head of the Tax Department, before taking early retirement in 2002. During that time he advised both company and individual clients. He now lives a less pressurised life in Devon with his wife and two daughters and maintains an active interest in tax law.

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    Comments

    Anonymous - About 2224 days ago

    Good clear article. we are not twice as well served by the government and local authorities as the doubling of taxation might have suggested. we need to keep plugging away at the govt cost base.
    There is too much waste and duplication across the board!

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    Conrad Vink - About 2223 days ago

    Which is a bigger problem for Mandy - the £85 in tax or the £110pw in rent she has to pay?

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    Anonymous - About 2223 days ago

    "Mandy can barely make ends meet. She is not able to save for retirement, or for a rainy day, and is always anxious about money. Her tax bill is too high."

    Yeh it's definately the tax bill not the £440 a month rent.

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    Anonymous - About 2222 days ago

    So Mandy earns less than £300 a week - and has to pay over £110 in rent for the cheapest possible flat in the area she lives in.

    And the problem is her taxes are too high?!!!



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