In the process of making my live updating Tax calculation I learnt a lot about how the current UK system works. Below are my thoughts. Also, through sharing this I also found the excellent Policy Engine, which is a far more advanced version of what I was trying to do, do check it out.
Items like the Basic Tax Rate and Income rate thresholds get the most attention in the news, but in terms of affecting the most people and also the poorest in the society, the Universal Credit Reduction Rate is much more important.
This is the amount that Universal Credit is reduced for every pound the household earns above a threshold, and is currently set at 55p. Reducing this to 50p for every pound would bring approx. 50% of the population into revieving Universal Credit and importantly would give no benefit to higher earners. Any other single change to reduce taxes will always benefit higher earners more than lower earners.
Reducing this rate to zero would effectively bring in a universal basic income.
Increasing the Universal Income Credit threshold would also be a measure targeted at the poorest in society while adding an added incentive to work. Of course increasing the Universal Credit amount is another very targeted measure.
Perhaps unsurprisingly Universal Credit is the most difficult part to understand of the current tax and benefits system. It is also near impossible to model, as there a lot of other factors that can change (usually reduce) payments - household wealth, location, disability status as well as an overall cap. It is almost as it the government wants to make it difficult to understand so that very few people can scrutinise or claim it...
I looked at income only because finding easy to use statistics on dividends and capital gains was not possible.
Differences in income in the UK pales in comparison to difference in wealth.
Taxes on unearned income (capital gains and dividends) are lower than taxes on earned wealth. The theory behind this is that they have already been taxed through company profit tax. However we should want to penalise unearned income vs. earned income, they should have a higher rate than income tax to encourage work. This would also stop the IR35 loophole for self-employed without requiring the current onerous bureaucracy.
Updating these rates would only affect income being claimed, rather than investments sitting idle. Currently the UK only taxes held assets through Council Tax. This is a highly regressive tax, as extremely large properties pay little more (or even the same) as much smaller properties. Ideas for reform include taxing on combined property totals (second homes and landlords), reforming the current banding system and taxing Land Value instead.
If you earn over £100k then you start to lose your tax free personal allowance at the rate of 50p for every pound earned. Please all get out your tiny violins...
But this leads to a very high marginal 60% tax rate between £100k and £125k, before it reduces back down to 40% from £125k to £150k before increasing again to 45% after 150k.
This clearly isn't fair - having a higher constant rate once above £100k could stop this inconsistency.