Why you pay more tax than banks

If you use air travel or drink alcohol in the next five years, then tax rises will hit you harder than the banks. Robert Powell takes a look at the figures...

Let’s be frank, 2011 is not shaping up to be a great year.

It’ll start with the VAT rise, progress with mass public sector unemployment and end with a scramble for university places before the planned tuition fee rise kicks in.

At least the royal wedding will cheer us all up...

But whoever you think is responsible for the financial mess we’ve found ourselves in, it’s hard not to place some blame on the bankers. But those ‘spivs’ and ‘gamblers’ in the city are going to have their wings well and truly clipped by the coalition’s tax on banks, right?

Wrong! In fact, new figures show that the government's much lauded ‘bank levy’ will actually raise less money over the next five years than taxes on air travel, alcohol and even death.

Let’s take a closer look...

The figures

The figures come from a report compiled by the Office for Budget Responsibility and show that the bank levy, due to come into force on 1st January 2011, will raise £10.7 billion between 2011 and 2016.

The levy will consist of a 0.05% charge to the bank’s total balance sheet in the first year – rising to 0.075% in 2012-13. But all lenders with a balance sheet of less than £20m will be exempt from the tax.

In contrast, the recent tax rise on air travel (of over 50% in some cases) will see British holidaymakers fork out £15.3 billion in air passenger duty (APD) in the same period.

Here’s a breakdown of how much will be raised from different types of tax:

Source: Office for Budget Responsibility: Economic and Fiscal Outlook – November 2010.

As you can see, in the five years between 2011 and 2016, inheritance tax will raise over £4.5 billion more than the bank levy. Drinkers and pubs will also be hit with every type of alcohol duty raising considerably more than the bank tax.

The report was released as Chancellor George Osborne resisted further calls from both Labour and the Conservatives' coalition partners, the Liberal Democrats, to increase taxes on banks.

Some may argue that any bigger increase in bank taxes will lead to huge companies relocating abroad. But still, on principle – do these latest stats really show that those with the broadest shoulders will bear the greatest burden?

Getting round air passenger duty

If you’re a family of four planning on taking a holiday to Australia any time soon you’ll pay £340 in APD. If you’d gone three years ago, you would have paid just £80.

The most recent APD rise took place last month and added a whopping 54.5% to the rates of tax on long haul flights to destinations such as Australia and New Zealand. Compare this to the 0.05% bank tax due to come into force next month and you start to realise why many see the levy as pathetically small.

But there is a way you can get round the rise in APD and still fly to far-away destinations. Many European airports are tax free to fly out of; fly via one of these destinations and you won’t pay any APD on the second leg of your journey.

For example, a family of four flying to the Caribbean would pay £300 in APD. But if you hopped on a cheap flight to Amsterdam Schipol and then booked a non-connecting flight to the Caribbean from there, you’d only pay £48 – as the second, longer leg would be tax-free.

If you are planning to do this, remember the flights mustn’t be directly connecting or you’ll pay the full tax rate. Unfortunately this means that if your first flight is delayed and you miss the second leg, you may end up both stranded and out of pocket.To find out more about travelling on the cheap read Net yourself a free holiday this Christmas.

Avoiding inheritance tax

Inheritance tax has been a bit of a political hot potato recently. The current exemption threshold is £325,000 or £650,000 for couples – and it's set to stay at that rate for remainder of this parliament.

Anything over this threshold will be taxed at a whopping 40% - that’s almost 1,000 times higher than the 0.05% first year bank levy. It appears that the government view the shoulders of rich, dead people as broader than those of the fat cat bankers!

But there are ways you can prevent shelling out for this death tax – read Avoid paying inheritance tax to find out more.

You can also use life insurance to offset your inheritance tax bill – you can read more about how to do this at 6.5 things you didn’t know about life insurance.

Have a cheap, boozy Xmas!

Alcohol duty has shot up over the last few years – the tax on beer and cider has risen by over 25% since 2008, causing many pubs to close in the process. Factor in January's VAT hike, and 2011 is not looking like a good year for British drinkers.

Certain tax rises on strong, cheap alcohol will obviously be welcomed by many, but this still doesn’t stop the sensible drinking public from being hit by increases in alcohol duty.

So to help you keep the alcohol bill down this Christmas I’ve put together a guide on getting the best deal on Christmas plonk, head over to Bargain booze for Xmas money-savers to read it.

What do you think?

Is the bank levy fair? Should a tax on banker’s bonuses be introduced? Or is all this banker bashing pointless? Does the real blame for the recession lie somewhere else?

Let us know what you think in the comment boxes below.

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