| Real Life Strategies for Building Wealth

Winnie-the-Pooh had an excuse.  He was, self-avowedly, a Bear of Little Brain.  But even he, I am sure, would have seen the stupidity of some parts of our Mr Osborne’s budget.

Let me explain to our transatlantic friends.  In the UK we have a social payment called Child Benefit (we like the word ‘benefit’ it seems).  This fairly modest sum is paid weekly according to the number of children in a family.  It is usually paid directly to the mother under the principle that it is to support children.  It is worth £20.30 a week for the first child, and then £13.40 for each subsequent child.

Some time ago Mr Osborne suggested it should be removed in households where one parent was on higher rate taxation – that is they pay 40% tax on income; about £44,000 a year based on a tax calculator. Osborne suggested that it was unfair that someone on £30k would be paying taxes so that people on £100k would benefit but that is disingenuous – after all the higher earners also benefit from the tax-free income of about £9k which applies to everyone alike.  Why not remove tax-free bands from higher rate payers.

There were immediate protests about the unfairness of this.  In many cases there are two earners in a family and therefore if one earned £44,001 and the other didn’t work at all, they would lose the benefit while two earners both on £43,999 would not.  The argument was also made that, if this had to be changed then it should be based on joint income but all Osborne has done now is to change the cliff-edge into a very steep slope – people would lose all the benefit between £50 and £60k in 1% slices.  Big deal, George.

And what about families with more than one child?  We have a number of friends with 4 children.  In these cases, there is only one major earner because looking after that number of children is in itself a full-time job.  So they will lose £60 a week or £3000 a year.  Bear in mind this is not taxed so to recover this at 40% tax means there is a dead-band of at least £7,200 where you are poorer but paid more.

Worse, there is a technical difficulty because benefits are paid weekly while tax is levied in arrears.  We pay tax as we earn but it is cumulative during the year.  People’s earnings change so child benefit overpayment will be clawed back by the tax system but this can lead to very high marginal tax rates.  A family where the earner is promoted or changes their job towards the end of the tax year – even half way through – will be taxed so that they pay it all back by year end.  So they will be worse off for quite a time.  Why bother?

The simpler way would have been to make the child benefit generally taxable and increased it so that basic rate payers would not be worse off – and those who pay no tax would have been a bit better off.   But this was a little too much for Mr Osborne although I am sure that Winnie–the-Pooh would have understood this perfectly.

What other stupidities do we see?  Well the flat-lining of age allowances for pensioners will cost those who survive until 80 years old.  Yes, there will be no change to those already in receipt but it means that older people will have no extra allowances compared to their sprightly younger folk.  Shame on you, George.  Of course they may conveniently pass away soon but it seems rather petty to me.  I suppose this clearly won’t bother Mr Gideon Osborne (Baronet – and yes, that’s his real name).

Stamp duty is an easy one to tackle and paying a 7% tax (up from 5%) when you purchase your £2 million mansion (and 15% if you buy through a company which is one of the wheezes that the super-rich do) doesn’t affect most people.  Houses for rent are also generally well under that radar.  And the reduction of the 50% tax rate for those earning over £150k is a political gesture – ‘we are all in this together’ although it hasn’t been our fault in the first place.  But reducing tax rates on the very rich does not look good to those on middle income and below in these times of austerity.  Thanks again, George.

There are other issues – some good, some bad.  Putting money into wired cities is a good idea (but then we live in Manchester which will be one of the beneficiaries).   Tax relief for the games and high-end television industries is also welcome although I wonder whether the film industry will be included.  Putting 5% on cigarettes is neither here nor there as that addiction should be kicked anyway.

But I reserve my last blast for the increase in bank levy, a 0.105% tax on the reported equities and liabilities of the banks.  This has increased not because the banks are wonderfully healthy again but because the previous level did not generate the income that was predicted.  It is complex to estimate and subject to accountants moving entries on the balance sheet around.  While there are only 30 or 40 banks that it applies to (those with assets less than £20bn are excluded), these have substantial intellectual assets at their disposal – they are probably cleverer than the combined boffins at the Treasury.   The estimate is that the levy will raise some £2.5 billion.  Now yesterday I showed that the combined income from interest payments on created money – which is all effective profit – was about £60 billion.  Surely a better way can be found to ensure that the banks pay a fair whack.  Why not tax the generation of money?