27 Apr 2012, 6:16pm
personal finance rant:
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  • Tax, Early Retirement and the Laffer curve

    Warning. This is a rant. It lacks charity and the milk of human kindness. This sort of thing happens when you discover other people spend more of your income than you do…

    I received what is probably the last P60 form I will get. This is a form that states earnings and tax paid over the year 2011/12 up to the 5th April. I learned that I paid more in tax and National Insurance this year than I have been living on. To the tune of 60-100% more. That’s right. If I retain my car in the coming year I will have paid 2/3 more tax as I am living on. If I don’t keep the car it will be 100%; I will have paid two years’ worth of running costs, in tax. For some strange reason that really pissed me off. It’s not even as if there is any 40% tax in there, FFS!

    How the P60 looks to an Ermine

    I’m really, really, sick of paying for other people’s children’s private school education and the general benefits culture. And I’ve done my bit for society, I paid too much 40% tax before discovering how to avoid it and turn it into something that works for me using AVCs.

    I used to think it was only swivel-eyed nut-jobs that talk about the Laffer curve. Either I have become one of those swivel-eyed nut-jobs, or the Laffer curve swings dramatically to the left for people of independent means.  For the benefit of any of the real nut-jobs Laffer never said that you increase tax revenue if you cut taxes. He merely said in some cases you do. I have never paid 50/45% tax, and never been near. As a retiree I will be a 20% taxpayer, but nowhere near the 40% tax rate unless it keeps coming down.

    The idea of the Laffer curve is if you tax people too much, and they give up and work fewer hours or retire early. Well, Q.E.D. in my case perhaps. Tax too little and you obviously get nothing at the limit case of a 0% tax rate, tax at 100% and everyone will be on benefits, so it is postulated that there is a optimum point, where Government realises the highest revenue. The French finance minister Jean-Baptist Colbert put it far more elegantly in the 17th century

    The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing

    I’ve been plucked enough, thanks. I will never get any benefits*, because most are means tested on capital assets. I’d be lucky if I get my State pension in 16 years’ time, because no doubt that will be means tested by then.

    an Ermine is not a Goose and he doesn’t like his fur plucked…

    I am already over the tax threshold if I take my pension, indeed some of the incentive to take it early and use investments to make up the actuarial reduction is to slow the invisible hand of the thieving barstewards of the government getting their mitts on more of it. I’m seriously looking at using a VCT to lose enough to get below the tax threshold if I have a desire to earn money in future. A VCT is to be looked at more like a lottery ticket rather than an investment, however, one discounted by 30% tax saving.

    The reason is I want to be able to play with microfinance and dabble with various ways of making small amounts of money, little bits of writing and perhaps the odd bespoke electronic gizmo, if there is a business case in the horrendous regulatory burden of CE marks, RoHS and testing that’s arisen since I last manufactured electronics for sale. It’s probably not going to be a big part of my life, but I want to see if there is some entrepreneurial streak in this salaryman.

    However, I can’t relate to giving up 20% of a lousy £100 earned that way, it would just really piss me off, and most of the ideas I have are non-physical things like writing and software, where you can’t write any input costs off to tax, they are the pure product of mind. I’m not going to rack my brains writing for the frickin’ government to pay for Ray’s Sky TV, thanks all the same. Unless it’s successful enough that I’m earning £2000 or more, in which case I guess I am no longer retired.

    Now if I can’t drop my taxable income so I can capture 100% of the fruit of my micro labour then sod it, I’ll not bother, I don’t need to earn money through working, and I don’t have a Calvinist world-view that work is good for the soul. Ian Duncan Smith can stick his work till 70 right where the sun don’t shine in my view.

    I am actually prepared to throw away the excess over the tax threshold, in VCT lottery tickets, or in paying an accountant to find a way for me to buy trees or some other slow-paying capital asset to write off as an input cost. Part of the problem is I have never been a sole trader, my previous non-employment forays were as a limited company which precludes lowering one’s personal income thereby reducing tax liability.

    The endless fight over the last three years to keep the thieving hands of the taxman off more of my earnings has highlighted just how much of my lifetime earnings disappeared in tax, and I just don’t want to feed the Beast any more. I’ve done my share over the last 30 years and that’s fine. In the unlikely event that I do get a State Pension they will no doubt be back for more tax. Until then, back off, guys.

    Don’t come away from this thinking I would have benefitted from Osborne’s tax cuts – I am not even in the top fifth of the UK income distribution, though for some reason I am further up the UK wealth distribution.

    I didn’t inherit that wealth. I am further up the wealth distribution than I was up the income distribution for two reasons

    • I am an old git at the end of my working life and
    • over those 30 years I didn’t buy more consumer shit than my salary could bear. I spent less than I earned.

    The difference between what I spent and what I earned is my accumulated wealth. I paid taxes on earning it. Unlike disciples of Ayn Rand, I don’t have too much of a problem with that. In the end I have no desire to enter the fear and loathing that is the US healthcare system, and the history of the privatised services show some services are better done in the public sector. Our water supply and railways were all more reliable in my experience before privatisation. The old Water Boards actually built reservoirs in the 1970s in response to droughts, and though the food was rotten, you didn’t have to raise a small mortgage to travel by train in the 1970s, and you could establish what the price of a ticket was a straight function of destination and timing, rather than the byzantine mess it is now.

    But what I do have is a problem with being taxed after I have taken major steps to pay my own way. I probably won’t get a State Pension because the buggers will means test it and conveniently ignore my 30 years plus of NI contributions.

    In theory I could claim tax credits or Universal Credit. If the government pisses me off so much I will do just that, just to get my own money back. It really is bizarre that I could be entitled to benefits just for watching the TV all day. What the hell is the point of me paying tax, and then going to the Labour Exchange and claiming the same money back? Where on earth is the sense in that, it’s a waste of my time and the DHSS’s time. This is all part of the anomaly of having a low starting tax threshold, and an outrageously low starting NI threshold.

    I’m not saying all tax is bad, and my 30 years of it should entitle me to the benefits of the NHS, and returned my debts to society in terms of schools etc. But when it’s getting to the feeling that I have no wish to use my modest talents to create wealth because of the Beast on my back then something is deeply wrong.

    This is the counterbalance of bollocks like this, and it damages the UK economy when people who can create things and ideas choose not to. Somebody might want one of my telemetry systems, and if they pay me for it I might spend the payment on crisps and beer, and it would presumably reduce their business costs or allow them to do something they couldn’t otherwise do. Likewise if I interest someone with my writing and it makes me money. If we want to keep a relatively high level of benefits then a high level of taxation is needed to service it, and some people get to write intemperate rants like this rather than working out how to make useful goods and services.

    Benefits are there to compensate for transient economic discomfiture caused by losing your job, and also to collectively support those amongst us who for reasons fo physical or mental incapacity can’t work. What seems to have happened is the benefits blanket has widened to encompass those who won’t work, or support lifestyle choices that are beyond their means.

    Don’t get me wrong. If I could live in a world where the Fairness Fairy waved her magic wand and we all got to live the lifestyles we wanted to without reducing other people’s quality of life by taxing the crap out of them, I’d be all for it. In the 1970s I was told that we wouldn’t need to work more than two or three days a week and would struggle to find what to do with our leisure time. Unfortunately what happened was that people invented things like iPads and mobile phones, bottled water and Sky TV, so everyone feels they need to spend more money to pay for all these things. Not only that, but half of the promise came true – the world of work only needs about half of the number of people that want to buy all these things.

    Thus we have the tragedy of there being jobs for about 60% of the people who want them, but these jobs demand a higher level of skill than many of the potential candidates. However, until recently we believed enough wealth was created in the economy that we could pay a lot of the 40% either middle-class pay by inflating the number of jobs in Government, or a acceptable working-class standard of living in benefits, particularly if they had children or if they claimed to be incapacitated. Only in the last five years did we discover a lot of that wealth was borrowed money.

    The losers from this policy are spread across society. The young in general seem to be getting the short end of the stick as the world they expected to move into has been suddenly hammered. The truly incapacitated also take the shaft, because they get lost in the noise of the numerous malingerers cluttering up the system. Those who have built unsustainable lifestyles on the benefits teat are also going to be mightily dischuffed when the gravy train starts to dry up.

    Addendum – The Ermine gets an upside for baring his needle-sharp teeth in the mirror!

    One of the benefits of writing the first draft of this intemperate rant a week or so ago was that the whole concept of paying too much tax even as a retiree pissed me off so much I reinvestigated the technical reasons that made me believe I had to draw my pension immediately on leaving The Firm, to get a Sharesave scheme that was particularly advantageous. I discovered that the technical reasons ceased to apply to me earlier this month, and since I am still on the payroll I can defer my pension and still get Sharesave.

    Since I can only get £10k a year into a S&S ISA there’s no point in liberating my pension commencement lump sum early and then stressing how can I invest a cash lump sum so it doesn’t get destroyed by inflation. The Firm’s AVC cash fund is good enough 1, and tax-free. So I don’t need to become a basic rate taxpayer, and I may now consider doing some of those microfinance jobs because I will be so income-poor I won’t pay tax on them. As well as that, an additional benefit is each year I don’t draw my pension it goes up by 5% (because the reduction due to early retirement is less), though since I will be a 20% taxpayer on it the increase is in reality only 4%. It’s not easy to get that sort of return on cash at the moment.

    There’s also a more indirect business case for delaying my pension for a few years, also due to the distorting effect of taxation. There is an ambition to lift the UK tax threshold from its current £8000 to £10000 over the next three years. Saving 20% of £2000 is £400 worth of tax I don’t have to pay, adding up to £1200 over the next three years. It isn’t a lot of money, but I am sure I can spend it better than the Government, and it compensates me a bit for not having the utility of the money now. I also don’t need to buy expensive VCT lottery tickets until I can get my head around the issues. And I have more years to sling the redundancy money into ISAs before I have to work out how to invest my pension commencement lump sum.

     

    *That paragraph was written before I discovered I can defer my pension, which opens up more opportunities. I may well claim working tax credits, if you can’t beat the buggers, join ’em… In which case the statement I’ll never get my go at the benefits teat won’t hold. I still won’t build a lifestyle on the extra money, though. I’ve seen what happens to people that do that and it ain’t pretty.

    Notes:

    1. addendum to the addendum Sep ’12 it used to be, but since changed adversely

    Have you ever considered moving to Singapore? 🙂

    I truly sympathise with the tax lightbulb passion ermine (luckily mine went off nearly a decade ago now) but VCTs are a lottery.

    60% of £1 is more than 100% of 50p.

    I would never say never, but VCTs aren’t even as attractive as when I made my relatively fortunate forays. (Back then you got 40% relief regardless of tax bracket, and you only had to hold for three years).

    Don’t forget liquidity, either. I sold some of mine in painstaking and expensive fashion, but I couldn’t sell others without a big hit, and in one particular case it eventually hit me hard.

    I think we’re very similar in our attitude to tax. The safety net was a great idea that’s ended up trapping the middle class inside it.

    I love the introductory warning by the way. I’m guessing that the fact that people like Shona often end up on benefits after they lose their job isn’t going to melt your heart?

    I thought you were being over dramatic so I headed over to the stats: http://www.hm-treasury.gov.uk/d/peowp201011.pdf (page 8)

    But it does indeed seem that 48.2bn is spent to “Promote work as the best form of welfare for people of working age, whilst protecting the position of those in greatest need”, which you should note does not include 12.3bn for pensioners and 19.6bn for disabled people.

    This adds up to 10.5p for every £1 you pay in tax so maybe you do have a point.

    Here are some shocking stats with regard to benefits (real life examples).

    I rent predominantley to housing benefit tenants. They received a large income tax free each week and have a fantastic life. There is just no poverty out there (unless you are a true single). IF you have a child you will receive approx £240 per week. This is down from about £300 a few yrs ago.

    I have a family of 9 kids (2 left home now so down to 7 living at home). They received about £550 in benefits per week. The mother has decided to get a job and the father wil be the Stay at home dad. They will still get their tax credits of £350 odd and earn approx £200 in take home pay. We are waiting to see how much housing benefit will be reduced by, but i think they may still get £100 a week for this. So now therir income is a wopping £650 per week (after any tax).

    I had a genuine disabled tenant last yr (who moved on when he received a compensation award so he could spend it on holidays before he became peniless again and so entitled to full benefits). His income per week was £320 and he was holidaying all over europe on that.

    Also none of these tenants will be paying couincil tax. This is what the labour government have allowed to develop and it is a huge drain on our society. Robbing businesses of workers willing to do a job (hence we need to import the foreign labout to do these jobs).

    The whole system is a mess and it just cannot be changed at the stroke of a pen. There has to be a gradual withdrawl of this financial heroin.

    So this is where you taxes are predominantly going my friend. As for me i dont really think i benefit that much because i would be renting out these properties anyway to the same people. The bit which should be squeezed is the disposable income these families have, not the rents paid. They are not excessive at all. I am also not a slum landlord as many seem to think of us landlords renting to this sector. I work hard and do all my own work. The houses are renovated to a good std. The landlord is always a scape goat in my opinion, working in a corrupt governmant system.

    ps. 2 of my examples also have sky tv.

    @ermine Looks like all these government cutbacks over there are killing what’s left of the UK economy. That’s what always bothers me about taxes. Most of the money seems to go toward subsidizing business or padding the pockets of politicians and hangers-on. Meanwhile, schools, health care, pensions etc. seem always to go down the chute in the name of austerity. Sometimes though we see the true picture as it is that businesses that always claim they pay too much are always lined-up at the trough of gov’t. subsidy and, gee whiz, the economy’s in recession ! What does that say about the real economy ? I wonder why the same guys who attack the welfare state are the same guys who benefit the most from it, Big Business. The same guys who usually pay the least in taxes ! Don’t forget we’re not really paying Ray, we’re subsidizing Sky TV ! I’ve always felt that way and always will. It’s a vicious circle that really needs to be broken. The first step is getting business to pony-up if they want to get their welfare cheques. The way I see it is the wealthy have basically off-loaded the cost of gov’t. onto the working and middle-classes and feel it’s their right to plunder the people’s money while insisting at the same time all the need for austerity for the people. Now that the gov’t. has gone too far with cutbacks, eating into their profits, the same guys will probably start pushing to create new ways of getting the gov’t to go back and spend more money so that they can go back to biz as usual. In other words, hands off Ray’s Sky TV ! ( Depressing isn’t it ? ) : ) Where’s it all gonna end ?

    A good rant get it all off your chest, much better then bottling it up.
    You state that ypu have paid 30 years NI, for your pension, I paid 44 years to get the same.

    But you will get your State Pension, they can’t means test it, Gordon tried this one early in New Labours Reign. He found out that, The State Basic Pension is a Contract in Law. i.e. If you pay 1/44th you get 1/44th of the current state pension. Or using current figures 30/30th you are entitled to a Full State Pension at its, Current Rate? Which means, they can freeze it, Reduce it, but they cannot means test.

    Hence all othe benefits are means tested, Job Seekers, Incapacity etc. Unfortunately you will have to include in your Taxable income. Hence I get my full State Pension Paid, but my tax coding is altered so that i pay 20% of my SS via my Company Pension.

    A lot of sentiments i understand, here is a copy of correspondance i sent to MSM and my MP some years ago. You may find it interesting.

    A tale of two people

    We shall call them Bill and Ben, both are the same age and started work at the same company on the same date. Bill was always a bit of a worrier, what about the future, whilst Ben’s attitude was one of let the future take care of itself.

    After a probationary period, both men were invited to join the company pension scheme. This would involve a payment of 5% of their gross wages into the pension scheme whilst the company would pay £2.00 for every £1.00 they paid. After every years service they would earn a pension entitlement of 1.25% of their gross wages, plus a lump sum of twice this amount, up to a maximum of 50% of their wages.

    Bill thought, this seems like a good idea and signed up. Whilst Ben’s attitude was why have a pension, I’ll spend my wages and enjoy life while I can.

    They met different girls, got married and settled down. Bill decided to buy a small house on the new estate being built near where he worked. He had always been careful, saved his money, so was able to put down 10% of the value of the house as a deposit. He borrowed the rest from a Building Society at 5% to be paid back over 25 years. The repayments were just about 1 week’s gross wages, it would be a struggle but at least they would own their own home.

    Whilst Ben thought I’ll put my name down on the council list and get a council house. The rent would only be 10% of his week’s wages.

    As the years went by the % rates on Bills mortgage rose and fell, at one point reached 14%. Bill struggled to meet the payments, but meet the payments he did. He also decided that when the % rate was 14% and then fell back that he would continue to make the same payments. The result being his mortgage was paid of over 18 years, not the 25 years as originally agreed. Bill still being a cautious person thought, if I put what I had been paying in mortgage payments into a savings account, It should grow into a nice nest egg for a rainy day.

    Whilst Bens rent had only risen by the rate of inflation, and it still only represented 10% of his wages. He had also bought himself a second hand car and eventually ending up new one. Also Ben made sure that he would be down the pub or club every Saturday night and he would have at least one, maybe two holidays a year. Plus an occasional city weekend break. Basically enjoyed himself and saved very little, still the same attitude live for the day.

    As I said before Bill and Ben both had worked for the same company for the past 25 years, doing the same job and earning the same wages. Unfortunately, the company was to be closed down and all the staff to made redundant.

    Bill thought well never mind at least my house is paid for and with my redundancy money and my nest egg I shall be all right. Whilst Ben, even though he was older, his attitude remained the same. So he bought himself a new car and a caravan and would let things take their course.

    When things had settled down Bill had his company pension of £190.00 a week before tax, plus his redundancy, pension lump sum and his nest egg. This meant that after paying tax on his pension and his council tax he was left with £148.00 a week to live on. Still he had always been careful and at least he had his savings to fall back on.

    He met Ben in town and they mentioned how they were both getting on. Ben told him that he had just returned from a months touring holiday in his caravan and that shortly they would be moving from their council house to a one bed roomed flat in a new retirement complex. Which because he had no pension, or savings would be rent and council tax free, Also he had a payment from the DHSS for £190 a week because this was the minimum that the state reckoned that a couple needed to live on.

    Bill decided to see if he was eligible for any help as after paying council tax he and his wife only had £148.00 a week to live on. After filling in an assessment form he was told that because of his savings he would receive no help. In a fit of pique, he said that he would spend all his savings and would make a fresh claim. Were he was told, “he would have to justify that he had not wasted his savings, and if it was thought that he had squandered his savings. He would still not be entitled to any assistance”.

    To rub salt into his wounds, he as just met Ben again, who told him that he his off to spend a month touring in his caravan in Europe. Also the interests on his saving as fallen to almost zero.

    As you see, there is nothing new, but i do get free presc, bus pass and winter fuel allowance.
    At least, if the State gives you nothing, they can’t take it of you

    Before I left work, 23.66% of my gross pay went in tax. Now, the comparable figure from my pension is 10.5%, so I feel pretty relaxed about it. This, together with the 20% I pay on my cash, the notional 10% on equities and the various ways of reducing tax, mean that I do not really begrudge the current tax situation.

    I do share, however, dismay at the misallocation of funds for some benefits and the facile swipes taken by HMG at investment. Call me Attila, but I think a freeze on all non-contributory benefits would have been good idea within the current spending envelope in order to promote infrastructure spending and jobs.

    You can’t change it, but you can leave – it isn’t the Hotel California.

    But if you choose to stay because of family, love of the culture, whatever, then you know in advance what it is going to cost – resentment and distress.

    Dear “Attila” 😉 and ermine,
    You are not alone: Another Indian economist who is minor-ly famous on the Interwebs wrote a minor rant on welfare schemes changing human behaviour

    http://ajayshahblog.blogspot.in/2012/04/welfare-programs-change-behaviour.html

    On other news, I hope you are both doing well?

    Surio.

    > But if you choose to stay because of
    > family, love of the culture, whatever,
    > then you know
    > in advance what it is going to cost –
    > resentment and distress.

    Well said, Trevor Brown. I know exactly what you mean.

    @MSC Too humid, by the looks of it. I hate hot weather, and I hate humid hot weather even more 🙂 I take it they have a more benign tax environment?

    @Monevator I don’t need to tangle with VCTs now I can drive my income below the tax threshold for the next few years. I can invest in my own/DW’s business. However, when I wrote that I was aware it was slightly irrational. Sometimes, to gain the freedom to act you have to be prepared to lose more. Being taxed on small enterprises would cost me more enhancement of wuality of life than losing the money in a VCT. Basically I’d rather throw money to entrepreneurs/capitalist pigs than Ray’s Sky TV even if it didn’t make sense!

    @Colin that’s a fascinating insight – I’ve obviously been somewhat insulated in the world of work to look around and see what happened out there!

    > The bit which should be squeezed is the disposable income these families have, not the rents paid.

    Indeed – I guess we’re paying for Gordon’s grand ambition to eliminate relative child poverty!

    @g not quite sure where you’re going with this one. And this was a rant, so it lacked balance. The UK State pension seems to be going in the right direction, though occupational pensions have been made a right mess by the forces you describe. Health care also seems to be doing okay – I actually managed to get NHS dental treatment for the first time in 10 years, I’d always had to pay my old NHS dentist privately ever since previous administrations had screwed the system up over the years.

    However, we hae seriously disincentivized working since I started work. I hadn’t realised this, and it offers me opportunities.

    @Lupulco – I’m chuffed that they can’t means test the SP, though I haven’t yet managed to substantiate this or GBs attempt to stuff it.

    If that were the case I probably won’t suffer Bill’s fate. There seems to be a process of unwinding some of the pernicious means-testing of the pension. But yeah, Ben could do with a squeeze on his disposable income.

    > State gives you nothing, they can’t take it off you

    I think the source of this rant was that they were taking it away from me – right now! However, I have seen the light, and the clawback starts tomorrow when I jack up my AVCs and share incentive plans to drop my income below the tax threshold.

    @SG I’ve taken a look back over my last P60s and either you did a better job with your AVCs, or I screwed up somewhere, or the difference is me not having children and the associated effect on taxation. Either way, for the last three years the ratios are an average of 26% in tax an NI. And a salute to Attila from Genghis here 😉

    @Trevor I’m not rich enough for the Swiss to have me! And the choice isn’t between leaving and putting up with it. The world of benefits changed hugely since I last interacted with it over 30 years ago. Although I had read the carping in the papers I never really believed it. However, it’s true. Tax is the enemy, but benefits are the opportunity, and I fully intend to claim some of my own money back from The Beast.

    @Surio

    A much more civilised rant from Ajay Shah , and yet another pointer that I should STFU moaning and get on with clawing the cash back.

    We’re doing fine, it’s tedious working out the next couple of months particularly as I have to lose as much of my income into AVCs as I can, but I’d quite like to see the final Olympics project go well, it is already being installed. Though since I’ll leave at the end of June I’ll stay clear of London during the Olympics themselves – when the military starts to think it’s a really great idea to station surface to air missiles and gun emplacements on the city roofs I’m not sure whether it’s the putative enemy or the solution that’s the greatest concern…

    @ Ermine
    Thanks for your reply. GB threatened to means test the SP shortly after he got in, but some of the “Rich and Powerful?” threatened a Legal Challenge, so rather then risk a test case, he backed off.
    The rest he Meenly, means tested, hence when i signed on the Dole. I was told, “even though i had enough NI Contributions, i would still not get JSA. Reason given for every £1 my Company Pension was above JSA they had to deduct £1. Hence no JSA, but i would get a NSI Credit.
    I understand the rant about what they are taking off you now, but as a Pensioner, who apart from State Pension, take nothing else. Hence they give me nothing so they cannot take it of me.

    But i do think that a simple freeze of all benefits etc till the annual government spend is in balance would have worked, let inflation do its job and fiscal drag the rest. Then use the breathing space to sort out a long term fix. Maybe a Legal agreement that ALL Governments balance their books?

    Try looking at this link.
    http://www.guardian.co.uk/news/datablog/2010/oct/18/deficit-debt-government-borrowing-data#data

    @Ermine – I think income tax maxes out at 20% and I remember Niall Ferguson citing it as a good example of the economic growth that can be created from low taxation in one of his programmes.

    From this wikipedia extract it looks like they keep the welfare system under tight control too:

    “Acute poverty is rare in Singapore; the government has rejected the idea of a generous welfare system, stating that each generation must earn and save enough for its entire life cycle”

    http://en.wikipedia.org/wiki/Singapore

    @ermine My point was, though it may not seem clear, is that people don’t mind taxes when taxes are fair, and they get something for their contribution, but when your class becomes the contributor and pay higher taxes, while the wealthy contribute less and at the same time want to eat your tax contribution through living off the Rays of the world, for whom you also contribute, and then try to work it so that the services for which you pay should be diminished or eliminated because the wealthy don’t want to pay their fair share of taxes,then that is unfair, and that definitely is a disincentive to work or pay taxes . How’s that for a run-on sentence ?

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