Wot No Income Tax?

Two weeks of doing chores in familiar surroundings has left plenty of time for quiet reflection…… Here’s something that struck me last week as I submitted our 2017-2018 tax returns: Dossers like us, if they organise themselves properly, can live quite nicely without paying any income tax at all.

It doesn’t seem quite right really….. I’m sure no-one purposely designed the system in our favour. More likely, the combination of the sources and amounts of our income mean that we’re falling through the gaps in the system. Governments like to be seen as being generous towards relatively low levels of investment income, pandering as usual to the pensioner vote. We appear to be picking up the bones the taxman throws in the general direction of poorer pensioners (i.e. those not in receipt of large pension income) who have some savings on the side. According to the UK’s Office for National Statistics (ONS), we fall in the top 3-4% of UK households by net wealth, so it’s particularly surprising to me that we’re being treated so kindly.

Some numbers: in 2017-2018 I paid no tax on my first £22,500 of taxable income. There’s a personal allowance (£11,500), Personal Savings Allowance (£1,000), Savings Starting Rate (£5,000 at 0%), and Dividend Allowance (£5,000 at 0%) that can all be claimed if your income looks like mine.

This year (2018-2019), changes in the allowances mean that I’ll “only” be able to receive £19,850 free of tax. If there are two of you, though, and you split your investments equally between you, it occurs to me that that’d be the first £39,700 of income each year tax-free (not to mention that Dossers like me do tend to shovel as much as they can each year across to an ISA to keep the future returns out of the tax net altogether – so £39,700 is highly unlikely to be a dossing couple’s only income). We do have quite a lot of flexibility in terms of which investments to hold outside of an ISA or SIPP wrapper, so we can shuffle things around from time to time to keep our taxable income down. We did pay some income tax in 2017-2018, but really not much at all in the overall scheme of things…….

I would quite understand it if working families, struggling to pay the bills after Her Majesty’s finest have deducted their fill of income tax at source, were pretty p***ed off at how lightly you can be taxed for earning income without lifting a finger.

Of course, we’re still paying indirect taxes (oh, hang on, most years we do a sizeable proportion of our spending overseas) and council tax. National Insurance (NI) is voluntary if you don’t work. As I’ve mentioned in a previous post (here), I do pay voluntary NI, but only because I think I’m being given a really good deal on that too….. Income tax is a biggie, though. Income tax represents 25% of the UK’s total tax take (source: Institute for Fiscal Studies); that’s a large pot that we’re effectively chucking a few coppers into each year…..

I wonder if things will change any time soon? Probably not so long as our mix of income allows us to continue to hide among the pensioners……

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