UK tax system 'needs overhaul'

Britain needs a much simpler and fairer tax system, an expert has said.

The UK tax system is in serious need of an overhaul, a new report from the Institute of Economic Affairs (IEA) has said.

According to Taxing Problem; The UK's Incoherent Tax System, the way the British public and businesses are taxed needs radical simplification.

Report author Ryan Bourne said the complex system lets people down by dragging millions of workers into the higher rate of income taxation, which harms those who are seeking to rise up the pay ladder.

The study found that this process - known as fiscal drag - has seen the top rate tax threshold slip by ten per cent in real terms since 1979, or by 43 per cent relative to pay.

Mr Bourne said that even the impact of universal credit in removing the worst effects of marginal rates will still leave many people being hit hard and lacking an incentive to earn more.

He also suggested measures such as removing the personal allowance for higher earners have created more complexity and said plans by Labour to reinstate the 50p top rate and create a new 10p rate for lower earners will make things even more "convoluted".

Those seeking jobs in accountancy and tax firms may understand the problems in the system well - as well as the impact such trends could have on their own net income.

Proposals contained in the report include statutory wage indexation to avoid fiscal drag, abolishing the savings income allowance and introducing a negative income tax rate for family-related benefits.

Editorial and programme director at the IEA professor Philip Booth said: "The UK’s tax system is not fit for purpose. It is complex and huge numbers of people - at all income levels - face very high marginal tax rates. The situation has worsened under this government. In the next parliament, we need urgent reform to create simpler and flatter taxes."

The issue of tax may become a particularly hot issue as the general election approaches, not least as the government has struggled to bring in the tax income it hoped for.

A study published last week the the Trades Union Congress said the Treasury has seen a £17 billion shortfall in revenue as a direct consequence of the low rate of pay increase and the high proportion of newly-created jobs that are low-paid.