An alternative, rational UK budget

The Tory government’s budget is due this week. As is the custom, the chancellor will stand up and propose what he will argue is the best thing for the UK economy. Numerous other customs abound, including the privilege of having an alcoholic drink to ‘steady the nerves’ during the speech.

In reality any chancellor’s proposals have little to do with the right thing for the economy. They are rather what he/she believes are best for his/her political party and its electoral prospects at the next election. In this case the Tory chancellor Philip Hammond is under unusual pressure to ‘go big and bold’, ‘fix the housing crisis’, and so forth – none of which has much to do with the actual needs of the UK economy, but rather the political predicament the Tories find themselves in amidst the chaos of Brexit.

So, in the absence of a bipartisan budget from anybody else, FIREvLondon hereby humbly submits its proposal for a rational budget – designed purely from the point of view of the long term benefit to the UK economy and its citizens.

A fiscally neutral budget

Unfortunately FIREvLondon’s financial resources do not extend to a detailed model of the UK economy. This is just as well because, almost unnoticed, the UK’s enormous fiscal deficit (the delta between government receipts and government spending) has in fact shrunk significantly since its 2009 peak of >10%, and is now at the decidedly modest level of £48bn. £48bn, “decidedly modest”?! you shriek. In fact £48bn represents around 2.5% of GDP. Provided the economy grows, in nominal terms, by more than 2.5%, then the debt will in fact shrink as a proportion of GDP.

There is an argument that with government debt at c.80% of GDP the priority should be to shrink the debt faster. I have sympathy for this argument – especially when the last chancellor but one preached that a national debt level of 40% was a ‘golden’ ceiling above which we must never go – but I am not going to make it here.

So, my aim is to leave the net fiscal deficit unchanged. I am also going to assume no significant change in government borrowing costs; were interest rates to rise significantly my spending projections would increase alarmingly, but for the purpose of tax/spending policy I think it is reasonable to assume no change in medium/long term borrowing costs.

Right now our tax code is riddled with absurdities. For instance

  • We tax jobs. At about 25% per job. Except the really high paying jobs which we tax at about half this level. You can’t make this stuff up.
  • We tax mobility. Via stamp duty. Via high property prices, planning laws etc.
  • We subsidise the rich. Via private schools having VAT exemptions. Via pension tax relief. Via Right to Buy, Help to Buy, etc. Via non-dom. Via EIS. Via carried interest.
  • We subsidise property. Every which way you look. Whereas in fact property is a much more natural thing to tax than people – it can’t move overseas, for starters.

My budget will take steps to start restoring common sense and rational thinking to the tax rates. Here goes.

Taxes on people (living and working)

Taxes on people who live and work are the highest. They should in fact be the lowest.

It gets worse. Taxes on younger people are higher than taxes on older people, in general. Compare the three illustrative London workers below:

Name Age Income Marginal tax rate*
Gary the graduate 30 £35k 41%
Nora the nurse 50 £35k 32%
Ben the boss 50 £60k 42%

* Tax rate meaning the rate of all deductions – tax, national insurance, etc – but ignoring pension contributions.

  • Gary is a relatively recent graduate, earning significantly more than the average wage but less than the higher rate tax threshold. Of his £1,000 payrise this year, less than £600 makes it into his pay packet; he has deductions of £200 of income tax, £90 of student loan, and £120 of national insurance.
  • Ben, Gary’s boss, who is too old to have incurred student loans, also got a rise of £1,000. He is a higher rate tax payer, so his £1000 has deductions of £400 from income tax. But as he’s above the upper earnings limit for national insurance he only faces 2% national insurance charges on any extra income and so only £20 is deducted from this pay rise. Happy days.
  • Nora, who treated Ben at Ben’s GP recently, is of an age where she didn’t need to do a degree to become a nurse. She earns the same as Gary. So if she got a payrise of £1000, she’d see deductions of income tax and national insurance of £320. But no graduate loan repayment for her, so her effective tax rate is lower than Gary’s. Principally because she is older.

In my view something is going wrong here. While we don’t have a severe unemployment problem in the UK, it can’t be right that we tax workers’ income significantly more than non-workers. We also tax ‘workers’ more than ‘robots’. This can’t be right either.

Part of why we split our worker taxes into income tax and national insurance is because of the supposed link between national insurance contributions to pensions and benefits. Pensioners don’t pay pension contributions, they withdraw income instead; national insurance works in the same way. And there is a cap on national insurance contributions because the idea is that once you have paid for enough ‘insurance’, you are done. In practice reality is very different; your national insurance contributions are not building your own insurance pot, but instead are paying for your predecessors’ welfare. One of the challenges for our system is that if the number of workers falls, and the number of dependents (i.e. pensioners) rises, then we need to tax work ever more highly. This can’t be sensible. And if pensioners expect their pensions to increase to cover inflation/etc, while current workers aren’t improving their productivity, we also would need to tax current workers more. This definitely isn’t sensible.

So, under my budget we are going to reduce the taxes on work, in a progressive way.

  1. First of all, we are going to eliminate the different classes of national insurance. Whether you are employed, freelance, or self-employed shouldn’t affect what you pay in tax.
  2. Secondly we are going to align the thresholds between tax and national insurance. This at least simplifies the regime.
  3. Thirdly we will remove the national insurance ceiling. This will affect about 4m people, and would add £16bn of revenues at current rates. We will use these funds to reduce employee contribution rates to 8%. This is a lower rate for lower income workers, and an increase for higher income workers.

Taxes on people (living but not working).

Taxes on non-working people are currently lower than taxes on workers. These tax payers are less productive and are creating less value for the economy and the rest of us. However, they also typically have fewer choices about what to do, and we must respect their need for predictability and stability in the rates they pay.

Unfortunately, we have fewer and fewer tax payers. The drop is most pronounced in the non working members of the population. While tax is not something to be enjoyed, it is important for our society that we all pay it. I’d much rather have twice as many people paying half as much, as half as many people paying twice as much. If we end up with only 49% of voters paying tax, then they’ll need to watch out – they could be outvoted by a ‘tax other people, not me’ party. This wouldn’t be sustainable, it wouldn’t be fair and it must be avoided.

With our recent moves to increase the personal allowance (except for people earning £100k+), and supplement it with interest and dividend allowances, an increasing number of non working pensioners now pay no tax. Is it any wonder that simultaneously the tax burdens have risen on younger, working people via graduate loans, higher VAT, etc? This isn’t right and it isn’t fair. Tax mustn’t become what “other people” pay – it is something we all need to have a stake in.

This being said, there are obvious administrative and bureaucratic benefits of removing the poorest, who pay the least tax. The poorest 23% earners, with income of less than £15k per year, contribute only 1.9% of all income tax. I’d rather remove them from the process altogether. However, by setting the personal allowance at £12.5k rather than £10k, we reduce 24m people’s taxable earnings by £2.5k, which costs ~£12bn. So I’m reducing the threshold to a level of £10,000. I’m also reducing the capital gains annual allowance to £10k, for simplicity. I’m also going to reduce the basic rate of tax from 20% to 15%, and to eliminate the withdrawal of the allowance for high earners ( which currently results in a marginal tax rate of 60%). Slightly more taxpayers, but less tax per person. This allows people to keep more of their money.

I’m not touching the student loan repayments. These are really the subject of another blog, and in case are at least partially ‘voluntary’, unlike our other taxes/contributions.

Taken together, these changes reduce Gary the graduate’s marginal rate to 32%, Nora’s to 23%, and increase Ben the boss’s to 48%. I don’t believe anybody should face marginal rates of over 50%, and this is good progress on that front.

Pensions: I hate changing regulations on pensions. However it needs doing, due to the inadequacies of the current policies. Current policy offers over £30bn of tax relief to the richest, and penalises good investors. So I will enact two key changes:

  • Limit all pension tax relief to basic rate. This is likely to raise £10bn.
  • Turn the lifetime allowance into a cap on the sums invested, not the sums in the pension. This will aid planning and stop penalising good investors. The cap will become £20k per year per person.

Taxes on people (dead)

Give me a choice between raising any given sum from living people or dead people, and I will always choose dead taxpayers.

There are wider benefits too in aiming for a meritocratic, market based economy, which inherited wealth gnaws away at.

I do however believe that the transfer of wealth from one generation to another is best left to private individuals, and not to the state. But I don’t believe I should be supporting silver spoons, or the preservation of heirlooms. I will accept that forcing the breakup of businesses due to death of shareholders would be undesirable, but I don’t accept that the only remedy to this is to exempt such assets from the grim reaper.

I’m going to change death taxes significantly. Instead of the tax being based on the size of the estate, I’m going to tax recipients – so the tax paid will depend on the income of the recipient. Provided they are UK taxpayers. For administrative simplicity we’ll allow a ‘windfall’ allowance of £10k per person; any excess above this is to be taxed as if it is UK sourced income. Charities will pay nothing.

Taxes on capital (mobile)

We in the UK are rightly proud of being an open market for capital. We regularly top the list of countries receiving Foreign Direct Investment. However there is an ugly side to this – some of the money invested here is sheltering from tax, and taking advantage of our unusually permissive regime. This then creates an un-level playing field between our decent taxpaying citizens and offshore tax avoiders; this tilted playing field is one of the drivers of the steep increase in property prices – inflamed by the higher returns tax avoiders can make than UK taxpayers.

We in the UK are unusual among OECD nations in not taxing investment income in many UK assets at source. The US, Australia, France, etc all solve this problem with a ‘withholding tax’. I will introduce a withholding tax here too, set at 15% of income. Indeed we in the UK levy withholding taxes on interest, but not on dividends. Yet with foreign shareholders owning a £1trillion of UK companies, this absence creates an important loophole – which I will close by imposing a 15% withholding tax on dividend income. Most of our overseas investors will not pay any more net tax but HMRC will retain a greater share of their tax take, and UK plc will benefit directly from having attractive investable assets. I estimate this will raise around £4bn of additional income.

Taxes on capital (immovable)

We have a crazy situation in this country where we worship property to an unholy extent. We subsidise property to a level that is rare in other countries. Our property values have risen to an extent that you need save more than an average annual salary just to have a 10% deposit. This creates profound rifts in our society.

Moreover land and property can’t flee the country. We have absolute control over how we tax it, unfettered by globalisation.

In recent years the tax take on property has risen significantly, with transaction taxes of up to 15% on the most expensive real estate. Stamp duty now raises £9bn, about half of which from London. However transaction taxes are in effect a tax on mobility, and a tax on efficiency. They discourage reallocation of capital. They discourage the movement of talent. They inject rigidity into our economy.

In contrast to other advanced economies, the UK approach to taxing property is unusual on several fronts. Other countries limit the tax exemption on one’s own property – as discovered by Her Majesty’s esteemed (? – Ed) Foreign Secretary when Uncle Sam taxed him on selling his expensive London home. Other countries suggest property markets can sustain transaction costs of around 5-6% but not more. And other countries typically have significantly higher annual property taxes than we do in the UK.

My budget will drastically reorganise the approach to taxing property. I’m changing the following aspects:

I will limit Principal Private Residence capital gains relief to £500k per taxpayer, or £1m per couple. This is a lifetime limit, similar to Entrepreneurs’ relief; I don’t believe we need provide a relief of more than £200k to anybody. This change will start in one tax year’s time, giving people some time to adjust their affairs in advance.

I will impose capital gains on commercial properties owned by overseas owners. This will close a loophole and insure the tax is liable on all commercial properties.

I will simplify stamp duty by eliminating the upper bands of 10/12% on properties worth more than £1.5m. The cap on the Principal Private Residence relief will more than compensate.

I will reform Council Tax in four simple but important ways.

  1. First of all I will engage Zoopla to support an annual revaluation exercise of all properties -residential and commercial – thus reducing the discomfort felt by long-overdue revaluations.
  2. Secondly, the liability will shift to the owners, not the occupants.
  3. Thirdly, our Council Tax bands still go A-H 25 years after its introduction; the top band H kicks in at £320k which is less than an average property in London. Yet there are over 500k homes worth more than £1m, who pay less than 0.2% of their house value in annual taxes. I will add 10 further bands, roughly every £100k of value. The top band T will apply to properties of £2m or more, and councils will be able to charge 10x more for this band; this will work out as less than 1% per year, which still compares favourably with other jurisdictions. This measure will raise approximately £5bn per year of additional tax for local councils/services.
  4. Fourthly, Council Tax payers will be able to apply to defer their Council Tax until the sale of their property, or death.

Other measures – housing

The measures proposed above will help our housing predicament considerably, by stimulating mobility and by starting to level the playing field between housing assets and more productive uses of capital.

In addition my budget will do the following:

  • Update the ‘right to buy’ with a ‘one in, one out’ approach. I will allow local councils to retain the proceeds of council house sales, but impose a new stipulation: councils must maintain or increase their housing stock; every council property they sell should be matched with a new property; I will given that the costs of construction are far lower than the value of property, and that councils can control the planning process, councils are in the best position to maintain the stock of public housing (and can make a profit out of it too!).
  • Allow councils to retain all of any council tax receipts from net new homes. At the moment very little of council tax receipts is retained locally. I will change this for any net new housing created – giving councils a clear incentive to increase this country’s supply of housing.


In summary my budget will make a number of important changes to the UK economy:

  • reduce tax rates on the lower paid, with base rates falling to 15%
  • make taxes more progressive, with a clear rise in the margin rate (even for younger generations) from around 33% to around 49% (unlike now).
  • a rebalancing of taxes from jobs – which can be moved – to property – which can’t.
  • a ‘fairification’ of our economy towards merit and hard work, and away from good luck and unearned wealth.
  • structural changes to encourage the supply of housing

These changes are ‘fully financially costed’ (ish), and so far as one can forecast given the wide-ranging reforms, fiscally neutral. The drop in basic rates is funded by lowering the personal allowances, removing the NIC ceiling, and creation of more council tax bands.

I’d welcome comments – how would you fare under my regime?  Have I missed anything obviously sensible?


Click to access bn09.pdf

13 thoughts on “An alternative, rational UK budget”

  1. I’m going to stick my neck on the line here and say that this is probably better than what Hammond’s going to come up with..

    Liked by 1 person

  2. Why not have a £10k capital gains allowance each year which you can roll over, and apply it to all current capital gains, but also to primary house sales and inheritances. So you can benefit from up to £800k of gains across your life, however they occur. That would make your extreme IHT change much more palatable and brake the housing market

    Liked by 1 person

  3. You’ve not mentioned employers NI. Employers pay an additional 13% (from memory) NI for all employees. Efforts by both employees and employers to avoid this is one of the drivers for freelancing and the gig economy. NI is a farce – it goes straight into general revenue while significantly distorts behaviour. I fail to see why employees should be taxed differently from people living off property or dividend income, nor why companies employing lots of people should have a higher rate of tax than companies employing none.


    1. @Kylie – I considered Employers NI but decided to leave it for several reasons (e.g. its less dulling effect on the margins than pushing employees marginal rate above 50%; it is low by international standards, and the contribution principle which I lay out below).

      I do however disagree with you re NI vs tax. There is a clear reason for some form of contributory principle connected to benefits/pensions. Simply put, if you want to receive something when you are retired, you should contribute to a savings/insurance pot beforehand. The core weakness of NI is not the fudge between it and tax (which is very real, although it does not quite fall into general revenue in fact – there is some hypothecation); the core weakness of NI is the lack of a stronger contributory principle.

      I happen to think that a tighter contributory principle would help alleviate the political concerns re immigrants/benefits/etc. It is also the de facto standard in the rest of the EU. So I would much rather tighten up NI than shelve it and boost pensioners’ sense of entitlement.


  4. How about putting the additional inheritance tax take towards paying a Universal Basic Income? Invest the take in a global tracker fund and pay out the safe withdrawal rate each year to everyone regardless of wealth and income. Takes the money away from state spending control and gradually redistributes asset ownership more equally.

    Liked by 1 person

    1. @John Were – this is a really interesting argument.

      On a similar note, I have long lamented the UK’s failure to set up a Sovereign Wealth Fund with its windfall proceeds (from N Sea Oil, telecoms bandwidth auctions, etc).

      I don’t think the core arithmetic of UBI makes sense, but I do think some form of ‘citizenship fund’ would be a strong proposition.


  5. “We subsidise the rich. Via private schools having VAT exemptions”.

    The rich are not subsidised here. If you send your child to a private school, you do not get a reduction in tax to allow for the fact that you are not using a place in a state school. If a private school place were £15000/year and a state school is around £5000, then the VAT break does not cover the cost of the state school place you are not using. Furthermore if VAT were charged on a private school why not on a state school as well.

    Strongly agree about the 50% max limit and the people saying the Employer’s NI should be added to the real marginal rate – it’s 13.8% BTW.

    On taxing recipients of legacies – surely that will break up businesses?

    Liked by 1 person

  6. Great piece – wish Hammond followed your thinking.

    Apart from the injustices and unsustainability of the current approach, there are two other (massive) issues here: the sheer size of the combined tax-take overall (income tax, CGT, IHT, Council Tax, VAT, road tax, fuel tax, etc etc) – with the accompanying belief that all problems are the State’s responsibility to solve – and the complexity of the system, that absorbs unbelievable societal resources to navigate and mitigate (accountants, lawyers, advisers, trustees, tax inspectors etc etc). Only area I really disagree with is on death taxes because many (most?) people want to work hard to hand something on to their kids – as John B suggests, why not for instance just have a simple £1m lifetime allowance for all capital gains and inheritances.

    On UBI, here’s a good read – it’s unworkable because the benefits system has complexities for good reasons, and so the income either has to be so large as to be unaffordable or so small as to be pointless:

    Liked by 1 person

    1. I too like the £1m lifetime allowance approach. Very simple and clear.

      I also very much agree with John Kay’s assessment of UBI. Thanks for sharing the link.


  7. I’m not sure where you are getting your information, but good topic. I needs to spend some time learning more or understanding more. Thanks for excellent information I was looking for this information for my mission.


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