Opinion: 5 things we are taxed on but shouldn’t be

A fairer taxation system would see these unfair taxes changed, if not scrapped entirely.

Nobody likes paying tax, though many of us would accept that it is a necessity.

The money raised through tax pays for things like our hospitals, schools and police force.

However, there are some areas where it is more debatable whether the taxman should be involved.

In fact, there are certain aspects of taxation that are completely unfair and should be changed.

Here are just a few examples:

Children’s savings

You might think that money saved in a children’s savings account is free of the clutches of the taxman, but that isn’t strictly true.

If a child earns £100 or more in interest from their savings account in a year, then the interest is taxed as though it is the parent’s money.

That may not have been a big concern in years past, when interest rates were miniscule.

But after Bank Base Rate was dramatically hiked to its current level of 5.25% between 2022 an 2023, it is now far easier for those savings accounts to deliver a three-figure interest return each year. 

The thinking behind the rule was that it would stop parents from looking to cut their own tax bill by simply stashing cash in their child’s account.

The simple way around this tax trap is to ensure that your child’s money is kept in an ISA.

Pension withdrawals

We’ve written about this a lot on loveMONEY, and yet the Government continues to drag its heels over putting it right.

When you make your first withdrawal from your pension pot, the taxman treats this as if it is the amount that you will be taking out each month, and so taxes you accordingly.

The trouble is that many people opt to make use of their 25% tax-free lump sum with that first withdrawal, and so take out thousands of pounds.

Because of the taxman’s approach, it means that thousands of pensioners pay the highest rate of tax on that withdrawal and have to wait until the end of the tax year in order to get the amount overtaxed back.

This has been going on for a decade now, and it’s mad, with millions having to be handed back to pension savers every year. It cannot be beyond the taxman to come up with a way to tax that first withdrawal properly.

Sunscreen 

A host of cancer charities have come together to lobby the Government to change its approach to the way that we tax sunscreen.

Sunscreen is an essential barrier against the harmful effects of the sun’s rays.

Indeed, it is common advice from the health authorities when the weather starts heating up to ensure that you regularly reapply sunscreen, not only to ensure you aren’t sunburnt on the day itself, but also to reduce your risks of developing skin cancer in later life.

However, when it comes to the taxman, sunscreen is treated as a ‘cosmetic’ product. As a result, it is subject to VAT, meaning we all pay 20% on top.

The argument goes that with money already tight, having to pay such a level of tax on what is effectively an essential health product is both unfair and damaging.

Child Benefit

The Child Benefit system in the UK remains convoluted despite recent tweaks to the system.

Once one parent earns over £60,000 a year, you have to pay the High Income Child Benefit Tax Charge (catchy name).

For every £200 of income above £60,000, you have to pay back 1% of the Child Benefit received in this tax.

As a result, if you earn above £80,000, you don’t get a penny.

First and foremost, it seems off to give someone a benefit and then tax them so that they hand it all back. But the way it is set up is fundamentally unfair too.

For example, the charge only applies if a single parent earns over £60,000.

So you could have two couples, one with a single working parent earning £80,000, and the other where both parents work and earn £40,000 a year each.

The second couple will keep all of their Child Benefit, while the first will have to pay all of their benefit back.

Parents could opt out of receiving Child Benefit in order to avoid the charge, but if a parent is not working then doing so means they will also miss out on National Insurance credits, effectively damaging their chances of earning a full State Pension.

It is also far too easy for mistakes to be made over the repayment of the benefit ‒ it may be that the benefit is paid to one parent, but the other is responsible for paying the charge in their tax return.

The whole system is a mess.

As we mentioned earlier, the Government has made changes to the system this year, increasing the point at which you start incurring the charge from £50,000 to £60,000 and the point at which you receive nothing from £60,000 to £80,000.

While that has reduced the number of people having to pay some or all of the charge, it doesn't fix the inherent complexity created by offering families a handout and then taxing them back on it.

Neither does it address the fairness issue where households with one parent earning above the maximum threshold get nothing but a household with two earning just under the minimum threshold gets the full whack.

Buying a house

We all know that buying a house in the UK is expensive.

The fact that we don’t have enough of them has pushed up the costs to record heights in recent years, even with the challenges of the pandemic, but there are additional costs involved too.

One of the most problematic is Stamp Duty, which is paid by the buyer of the house.

The Stamp Duty system is complicated ‒ different tax rates apply to different portions of the sale price.

For example, right now you pay 0% on the first £250,000, and then 5% on the next £675,000.

However, opponents argue that it prevents people moving when they would want to.

That doesn’t just mean first-time buyers, who simply can’t afford the tax alongside everything else associated with a purchase, but also downsizers who need that money to help pay for their retirement.

As a result, we have older people sitting in homes that are larger than they need, but which they don’t feel they can afford to sell.

Scrapping Stamp Duty, and perhaps replacing it with a land tax, would mean that there aren’t unnecessary barriers to transactions.