Tax – to start this article with a statement of the blindingly obvious – is a highly emotive subject for many people. It used to be for me too: I’d look at how much was being taken away from me, see evidence of money being “wasted” by the government, and get worked up about the unfairness of it all.
Over the years, my position has mellowed. I find it hard to get emotional about how much tax I pay, or muster any enthusiasm for doing anything out of the ordinary to keep my tax bill down.
(I find it far easier to get worked up about inflation, incidentally.)
This has come from two shifts in mindset.
Firstly, I’ve started thinking of tax as a subscription payment for a bundle of services I wouldn’t want to do without. Does my tax bill also pay for all kinds of things I don’t use, and perhaps don’t approve of? Does a lot of money get wasted or spent inefficiently? Is the tax code too complicated? Does the burden often fall in the wrong place? Yes, yes, yes and yes. But I’m not clever enough to come up with a better system or public-spirited enough to agitate for someone else to do it, so it’s not helpful to gripe about it.
Secondly, as I currently contribute more in taxes than the value of the services I use, I can think of it as a basic form of charity. I enjoy making charitable donations to causes I feel strongly about, but there are plenty of worthy yet unglamorous or invisible services that need paying for and would otherwise be overlooked.
My two principles for paying tax
I have two principles I use when thinking about decisions around tax. Just to be clear, these are personal principles I’ve established for myself. I’m not saying other people should follow them: I find them helpful, but what other people choose to do is no business of mine.
1: Don’t be cheeky
There’s an established legal principle that everyone is entitled to arrange their affairs so they pay the minimum of tax that’s legally required. Trouble is…there are so many exceptions, loopholes and workarounds, it’s possible to stay true to that principle while getting pretty extreme with the measures you take.
My accountant once told me that if I wanted him to arrange my affairs so I qualified for tax credits, he could do. This makes him an excellent accountant, but shows the flaws in having such a ridiculously complicated tax code.
So I take basic steps to prevent my tax bill from being higher than it needs to be, but no more. My general principle is not to do anything that either feels wrong, or that I’d be embarrassed about being public knowledge.
2: Don’t let tax dictate behaviour
Back when I travelled for the majority of the year, I’d often get asked whether I’d changed my residency to avoid paying tax. I knew lots of people with a similar lifestyle who established personal tax residency in a country with no income tax and earned their income through a company in another country that had no corporate tax, so they’d end up paying no tax at all.
I didn’t do any of that. Not for a moral reason, but because I couldn’t stand the idea of constantly having to count how many days I’d spent in the UK or deal with paperwork and bureaucracy in multiple countries.
I use the same principle for all tax decisions. If I want to sell a property, I’ll sell it – regardless of whether it triggers a tax bill. I won’t maximise contributions into a pension to reduce my tax bill today if it means there’s a chance I won’t be able to draw down on my investments when I want to.
It’d be silly to be unaware of the tax consequences of any action, but ultimately I’m not going to let tax stop me from doing whatever I want to do.
I’m sure you’ll disagree
Some people I’m sure would think that I should morally be paying more than I currently do, and others would say I’m morally wrong not to pay as little tax as possible because it encourages bloated government, introduces unhelpful incentives, and so on.
That’s the thing about tax: nobody is ever going to agree, so you might as well come up with your own way of thinking about it. My current framing works better for me than my previous framing, and I’d encourage you to come up with your own that works for you.