By Mike Hedges AM

There are four things that can be taxed, which are income, expenditure, businesses, and wealth.

While there is a commitment by the current Westminster  government not to increase the rates of income tax, there is no reason why dividend income and capital gains  cannot be taxed at the same rate as income tax, and for those who pay income tax and tax on dividend income and/or capital gains to have it aggregated and to get taxed accordingly.  

It is a long-standing anomaly that income earned other than by work is taxed at a lower rate. Richard Murphy of Tax Research UK said in the Taxing Wealth report that “charging capital gains tax at the same rate as income tax would raise £12 billion a year.”

With National Insurance, if you’re employed, you pay Class 1 National Insurance contributions. There is no reason for the National Insurance rate to reduce to 2% on higher earnings or, once you reach the state pension age, to stop paying National Insurance contributions. Currently National Insurance does not need to be paid after state pension age even if people continue working.

The Class 1 National Insurance rates for most people for the 2025 to 2026 tax year are:

Your pay	From 6th April 2025 to 5th April 2026
£242 to £967 a week (£1,048 to £4,189 a month)	8%
Over £967 a week (£4,189 a month)	2%

Dividend income is the distribution of a company’s taxable income to its investors, typically in the form of cash. It provides a steady stream of income for investors, allowing them to earn without selling their shares. Investors often prefer dividend-paying stocks for their potential to outperform the market and provide reliable earnings.

Currently dividend taxation is substantially less than income tax, with a rate of 8.75% on earnings from £12,571 to £50,270, 33.75% on earnings between £50,271 and £125,410, with an additional rate of 39.35% paid on earnings over £125,410.

For someone who runs a company, even as a one-person contractor, these are the three different ways to receive payment: salary, dividends, and pension contributions. Dividend income is exempt from National Insurance, attracts lower rates of tax and can be paid as often as you wish. Is it a surprise that many one-person contractors get paid via dividend, not via salary that attracts income tax?

The best indicator of wealth is the value of land and property. Property is taxed via council tax and inheritance tax; land is taxed via inheritance tax.

On council tax, the average Band D council tax bill in Wales this year is £110 lower than in England and more than 256,000 low-income households in Wales receive support with their bills through the council tax reduction scheme. Also, in some council areas most council taxpayers are in bands A, B and C.

While council tax is based upon the value of property, and it replaced the much-disliked poll tax, which itself had replaced the rates system based upon the rateable value of a property which is still used to tax businesses, it is not fair.

The principle is fair: the best indicator we have of wealth is the value of houses and property owned.

The value of council tax bands was set on 1st April 2003 so the value of all properties will have increased substantially since then and the relative values will also have changed.

Band A is for properties up to £44,000; band D is for properties between £91,001 to £123,000, while band H is for properties between £324,001 to £424,000.

Council tax is set on band D and all other band payments are based on that. Properties in band A pay 75% of the amount charged on band D. Properties in band H pay 18/9, or twice the amount charged on band D.

A £40,000 house will be charged two thirds of the amount of council tax paid for a £120,000 house despite being a third of the value. A £420,000 house will be charged twice as much in council tax as a £120,000 house and three times as much as a £40,000 property despite being worth substantially more.

This is unfair because the payment is not proportional to the value of the property. I continue to call for all properties to have a council tax set as a fixed percentage of the value of the property.

Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who has died. There’s normally no Inheritance Tax to pay if either the value of the estate is below the £325,000 threshold or if everything above the £325,000 threshold is left to your spouse, civil partner, a charity or a community amateur sports club. The standard Inheritance Tax rate is 40% and only charged on the part of the estate that is above the threshold.

Farms were almost entirely exempt from inheritance tax due to two policies – Agricultural Property Relief (APR) and Business Property Relief (BPR). Farm owners have been able to use a combination of these reliefs to pass on their farmland and associated business assets, tax free. These reliefs will together be capped at one million pounds meaning farmland and farm assets over that value will be subject to Inheritance Tax at 20 per cent. If you’re single, the Treasury states, “You will  be able to pass on up to £1.5 million of this to children or grandchildren tax free. That is the one-million-pound allowance for farm owners, plus the normal tax exemptions that everyone has, which are worth up to £500,000. For a £2.2 million pound farm, minus the £1.5 million in tax exemptions, that leaves £700,000 that could be taxed. Under the government policy, that £700,000 would be taxed at 20 per cent rather than 40 per cent as non-farmers pay. 

This leaves a theoretical tax bill of £140,000. The child or children can pay this off in instalments over ten years, interest free. That is more favourable than Inheritance Tax bills non-farmers pay, which face a 7 per cent interest rate.

So that is an annual tax bill of £14,000 for ten years, in this example. For  a married couple passing on a farm of the same value , £2.2m, the Treasury states: “Two people who jointly own a farm will be able to pass on land and property valued up to £3 million to a child or grandchild tax free.” This is because they could each pass on a £1.5m tax exemption. That means, in this example of a couple passing on a £2.2m farm, their children should pay no inheritance tax at all.

While the Tories, Plaid Cymru and the Liberal Democrat in the Senedd do not believe a million pounds is a lot of money, I do. The question is why on Inheritance Tax should farm assets be taxed differently to other assets?

Keep tax simple: charge the same rate on all income. National insurance should be set at the same level for all earned income; link council tax to the actual value of a property; and treat all inherited wealth in the same way.

Mike Hedges is the Senedd Member for Swansea East and a former Leader of Swansea Council.

Image: Mike Hedges. Author: Steve Cushen, licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.