Reducing my tax rate

FIRE v London29 Comments

Avoiding tax is probably the best-known investment advice, and the mission that unites even the least sophisticated investors with the most financially literate.

How the government wants you to avoid paying tax

As a wise blogger (SHMD, I think it was, but I can’t find the link) pointed out recently, the UK offers unusually generous investing tax breaks (and that’s even before we get onto SEIS and EIS angel investing tax breaks).  There’s almost no point in calling Panama.

For most UK investors, the simplest way to avoid taxes involves two manoeuvres, each done annually:

  • Topping up your ISA(s). ISAs remain the biggest potential tax break in the UK, but they require multi-year patience; there is an annual ‘use it or lose it’ allowance so to maximise the benefits you need to act annually.  The limit these days is £20k per adult, so £40k per couple – which is a lot of money to find from disposable income but not enough to squirrel a large inheritance/windfall/25% pension drawdown away all in one go.
  • Making pension contributions. For most retail investors, pensions are a fairly straightforward tax break; in exchange for locking my money up until I’m c.60, I avoid any tax on the money from now until I start accessing it. For more affluent but nowhere-near-retirement-age investors, such as me, the UK policy is pretty crazy, because knowing whether your pot is going to breach the ceiling 20+ years out is a mad Monte Carlo guessing game.  A 30 year old expecting to retire at 70 and expecting annual returns of 7% should be careful about taking their pot above £60k.

It is worth stating the obvious that not only are these two manoeuvres both 100% legal but they are in fact actively encouraged by government policy.

Practically all the readers of this blog are at least higher rate tax payers – i.e. their marginal income tax rate is 40% or more.  For them the two key rates on offer are 40% and 0%.

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Nov 2017: The King is gone.

FIRE v London4 Comments

Without meaningful term limits, the tyrant just went on and on. Well into his dotage, he seemed to have become preoccupied with furthering his dynasty by handing over power to his family.  And to preserving the family billions.  As his grip on power finally began to slip, the superficial stability of his regime visibly crumbled, replaced by an excited whooping and baying by the masses.  A mighty era, ending, this very month?

In fact, Rupert Murdoch remains in power for now. But the rumours are that the dirty digger may sell critical parts of his empire – studios, newspapers etc.

Slightly closer to home, Robert Mugabe is gone.  The king is dead, almost.  And good riddance.  I’ve held off visiting Zimbabwe until he’s gone and now the place has just opened up for me.  Except that his thuggish henchman, by all accounts, has replaced him with the full support of the army.  I may be waiting a little longer.

Meanwhile, out in the markets, what’s been happening?  Supposedly Brexit is all starting to come together, notwithstanding the not-very-minor issue of the only land border between the UK and the EU.  Certainly the forex markets cheered both the EU and the UK, with GBP up to a level it hasn’t seen since its steep Brexit slide. Meanwhile US markets continued their relentless upward glide, providing a benign backdrop for the bitcoin hysteria.

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An alternative, rational UK budget

FIRE v London13 Comments

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.

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