An alternative tax

The adoption in the UK of a transatlantic approach to income tax could appeal to a cash-strapped Chancellor.

“…only the little people pay taxes.”

That 1980s comment by the New York Hotel owner Leona Helmsley sums up an attitude that many taxpayers still believe to be true. Today the same idea often manifests itself in headlines suggesting that the chief executive pays a lower rate of tax than his (it’s usually his) cleaner. There is an element of truth in such assertions, as the wealthy generally have greater opportunity to plan when, where and how they receive their income.

The US has long attempted to address the problem with the Alternative Minimum Tax (AMT). The rationale behind AMT is simple: those with income above a certain threshold ($197,900 in 2020) must pay a minimum rate of tax on their income after deducting a flat exemption. If their tax bill calculated on a normal basis is lower than the one produced by applying the AMT rates, then it is the AMT amount that must be paid. There comes a point, therefore, at which tax planning has no benefit.

Two UK academics with links to leading think tanks recently published a paper examining the possibility of a UK version of AMT. With the help of anonymised HMRC data, the pair were able to show that the average effective rate of tax paid by one in ten people with income (including capital gains) of over £1m was lower than for somebody earning £15,000. The inclusion of capital gains is open to challenge and one reason why the result was produced – capital gains are more lightly taxed than income.

The headline proposal of the paper was that the UK government could raise £11bn a year – about the same as 2p on the basic rate of tax would produce – by applying an AMT rate of 35% to anyone with income (again including gains) above £100,000. For a government that was elected with a pledge not to increase income tax rates, AMT offers an interesting revenue raising opportunity.

If nothing else, these AMT proposals are a reminder that – at least for now – tax planning can save you money.

The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional. Past performance is not a guide to future performance and may not be repeated. Capital is at risk; investments and the income from them can fall as well as rise.