Why there is a cash economy

Following my post last Friday, on HMRC's view of the cash economy, I wondered exactly how much tax is paid in the UK on additional income. If someone decides to work harder and earn more, do they get their just reward?

The above numbers assume a higher-rate taxpayer has generated some self-employed income, perhaps by working evenings and weekends, and has generated £60,000. The new after-tax earnings are spent on a new family car. Unfortunately, our hard-working taxpayer dies suddenly after.

At the end of this little real-world saga, of the extra £60,000 earned, £46,726 ends up in the hands of the Treasury, being paid over in VAT and the various forms of taxation. That's a 78% tax burden.

And we wonder why there is a cash economy?

UPDATE

For the benefit of @RichardJMurphy here are my caclulations (per TaxCalc) of the Tax and NI due before the extra income and after the new self-employed income. The liability increases from £10,010 to £33,333, an increase of £23,323. Add the Class 2 NI paid separately of £130 and we get the figure of £23,453 shown above.

The self-employment work for our example taxpayer consists of advising the general public. Since they cannot reclaim VAT, and he is in competition with other providers on price, he is unable to add VAT to his fees and must bear the cost himself. Working from home, via the internet, his expenses are negligible and he has no cost of sales.

Shame on you (again) Dave

A quick dip into the twitterverse just led me to the article "Paying cash in hand is 'diddling the country', says HMRC's Dave Hartnett", published on The Telegraph's website. Apparently, the country's most senior tax man thinks that:

... householders have a duty to ensure that other people do not evade paying their share of tax.

Really?

He goes on to say:

Paying a builder or cleaner in cash, allowing them to evade VAT or income tax, will result in even deeper government cuts to public services ... People who contribute to the cash economy cannot then complain about austerity measures.

Oh dear Dave, you are wrong and out of touch with public sentiment. He should take a look at the results of the poll taken as part of the Telegraph article, which asked "Is it OK to pay cash in hand to tradesmen?".

There were also more than 1,200 comments added by the public when I last looked. The general summary of them making two points:

1. Householders do not believe it is their job to act like the Gestapo on behalf of HMRC, and
2. Small businesses are paying more than their fair share of the country's tax burden.

When in practice, I was often asked by clients if it was OK to pay suppliers in cash or, indeed, receive payment in cash. My answer was always an emphatic yes. The mechanism of payment is irrelevant to the tax position.

Mr Hartnett has made his fair share of PR blunders. HMRC's public perception is currently at an all time low, I suggest. Publicly inferring that all tradesmen who receive cash are, by default, "evading paying their share of tax" is a scandalous thing to say.

Shame on you (again) Dave.