Getting the balance right – a taxing tale.

When it comes to our preferences, we all have a soft spot for expensive or high-quality things that make us feel good. Whether it’s Range Rovers, exotic holidays, or stylish Louis Vuitton bags, these items bring us joy and often stand the test of time. We willingly spend our hard-earned money on these indulgences, recognizing that they offer long-term value and enhance our lives.

However, there’s an interesting paradox when it comes to investing in our own community and local amenities. As local elections loom, politicians pride themselves on keeping council taxes at the lowest rates in the county, or even the country.

But is this a ranking to be proud of? Shouldn’t we strive for the best roads, pristine public areas, vibrant and communal high streets, superior housing, and top-notch social care? Shouldn’t we aim to provide all the things we desire, even if it means investing more? It seems counterintuitive that to enjoy nice things, we should settle for rock-bottom prices. We should be aiming for the finest quality, more akin to Fortnum & Mason than B&M.

Just imagine if our country had savings in the bank instead of staggering debt at 100.2% of GDP, surpassing the EU average by 15.1%. In the midst of ongoing strikes affecting the majority of the population, wouldn’t it be wonderful to feel a little more financially secure?

Perhaps we could afford to grant teachers and nurses the pay rises they deserve, without fear of inflation. Even better, we could prevent cuts from happening in the first place. Imagine a world where the National Institute for Health and Care Excellence and the NHS didn’t have to choose between life-saving treatments or revolutionary research grants. We could have it all.

Taxation is the primary means by which we fund these “nice things” in our country, but it suffers from a significant public relations problem. While we all contribute to the system that sustains the infrastructure and services we rely on, paying taxes is rarely a topic spoken of with enthusiasm. Tax is often associated with difficulty, whether it’s described as “taxing,” “taxidermy,” or the notorious “taxman” who takes a substantial chunk out of our hard-earned money. 

There are valid reasons why many of us begrudge paying taxes:

1. Waste: News stories of politicians squandering money and claiming expenses for dubious purposes, coupled with instances of benefit fraud and exploitation, fuel our frustration.
   
2. Inefficiency: The inefficiencies in our systems, such as encountering unnecessary bureaucracy when amending a hospital appointment or the questionable distribution of private contracts within the NHS, leave us wondering how much more efficient these institutions could be.
   
3. Corporate tax avoidance: Companies like Amazon, Starbucks, Apple, and Google have faced criticism for not paying their fair share of UK tax, amplifying our sense of injustice.
   
4. Bank bailouts: When we see our hard-earned money going toward rescuing banks and funding eyewatering levels of national borrowing, we question why we must shoulder the burden for their mistakes, while their executives continue to amass wealth.

After working diligently throughout our lives, the last thing we want to hear about is duck houses and questionable PPE contracts. Undoubtedly, there is waste within the system, but it’s important to note that the vast majority of taxpayer money is spent on the national good—the infrastructure and services that allow our country to function.

Consider this:
Benefit overpayments due to fraud for the financial year ending 2022 amounted to £8.6 billion. (Underpayments were £2.6 billion, but we’ll set them aside for now.) It’s worth mentioning that the figure for benefit overpayments was significantly higher in the years impacted by the COVID-19 pandemic.

In total, tax receipts from April 2022 to March 2023 amounted to a staggering £786.6 billion. So, even in a pessimistic scenario where we ignore benefit underpayments and accept the higher figure for overpayments in 2022, benefit fraud accounts for approximately 1.09% of total tax receipts.

Similarly, during the first year of the pandemic, £4 billion was spent on unusable PPE—an amount equal to 0.5% of tax receipts. While there is no defence for such wastefulness, it’s important to acknowledge that even if we consider a substantial figure like £39 billion as waste (representing 5% of tax receipts), it still implies a 95% efficient system. Additionally, reports suggest that the amount of uncollected tax hovers around 5%.

Admittedly, the tax system may have its leaks and inefficiencies, but inefficiencies exist in various aspects of our lives. Consider the typical diesel engine, which is around 55% to 60% efficient, or conventional gas boilers, which offer 70% to 80% efficiency that decreases over time. Gas stoves are only about 40% efficient (compared to 74% for electric hobs and 84% for induction hobs). These inefficiencies directly impact our expenses.

The more money we receive in tax receipts, the more we can allocate to the things we desire, even if some of it is wasted. Just envision the outcome if we were to invest in:

• State-of-the-art hospitals with efficient systems, pampering our doctors and nurses, eradicating 12-hour shifts, and attracting the finest talent from around the world to our cutting-edge centre of health and research.
  
• Exceptional schools where teachers are content, education is tailored to children’s strengths, and we lay the foundation for a better future, not only for the UK but for the entire world.
  
• An effective and fair legal system that upholds justice and ensures societal harmony.
  
• Substantial reserves are ready to weather any storm that may come our way.

How much more would you be willing to contribute to be a part of the best country in the world—one that outshines even the Scandinavian nations?

We often hear that countries with the highest tax rates tend to score the highest on annual happiness indices. Take, for example, Denmark and Finland, both ranking high in tax contributions as a percentage of GDP and topping the World Happiness Report 2023.

While it’s true that money can’t buy happiness, could this correlation be purely coincidental? 

Certainly, it doesn’t hurt to be tax-efficient. In fact, it’s actively encouraged through various tax incentives. The more you save and take care of your own financial well-being, the less you’ll rely on the tax system later on. Not only will this give you the means to enjoy the things you desire, but it may also empower you to help others.

As the new tax year begins, it’s an opportune time to explore ways to enhance your tax efficiency. Consider:

• Utilising your ISA allowance early in the tax year to maximize your savings potential.
  
• Maximizing pension contributions within your means.
  
• Holding income-producing assets such as cash, investments, and property in the name of the lower taxpayer in a couple.
  
• Leveraging the Marriage Allowance if one partner earns significantly more allows the lower or non-taxpayer to transfer £1,260 of their unused personal allowance to their spouse who earns above the personal allowance.
  
• Use your capital gains tax allowance each year to minimise tax on investment gains.
  
• If you’re a high earner, consider investing in venture capital trusts or enterprise investment schemes. These schemes support new businesses and offer tax incentives for investors.

Remember, paying taxes may not be glamorous or exciting, but it’s a vital part of creating the kind of society we want to live in—one with the best infrastructure, services, and opportunities. 

Let’s aim to get the balance right.