Vir Cantium

I'm right, you know …

The Strivers’ 76% Tax Rate – Aren’t #UkUncut Happy Yet?

I’ve blogged before about the case for merging income tax and National Insurance, and it seems that it might be getting some traction in the Treasury. Just for fun though, let’s look at the draft rates for next year (2011/12) to see what the typical employee is paying in tax and NI:

So there you are, an employee with your modest 25k salary, say, happily thinking you are only paying tax at 20%. Yes, you’re not that silly, you know your actually paying 32% next year, don’t you, because you sensibly recognise that NI is just another income tax. So let’s merge them and be done with the pointless deception. yes, there are exceptions such as pensioners who don’t pay NI, but that’s a detail which can be sorted with a different rate or higher allowance. Focus, people!

However, as Tim pointed out a couple of days ago, you’re still wrong. Your employer has to pay the taxman 13.8% of your salary for the estimable privilege of employing you – you know, that “tax on jobs” we heard about in the last election, before the increase from 12.8% was scrapped. So the cost to him is not £25,000 but £28,450, of which you only see £19,362. So your graft is producing £9,087.64 – an overall tax rate of, coincidentally, about 32%.

Earn another £10 though, and how much will you get? Using the same rates, you will get £6.80 in your pocket, but generate £4.58 in tax and NI – a marginal rate of 40.2%. And yet you’ll open the ‘papers and they’ll talk about the 20% basic rate. Humph. Head north of those figures and, including Employer’s NI, the maximum combined marginal rate of all direct taxes is not the (rightly) much derided 50%, but 66.6%.

Yet it gets worse: what really puts the feline among the feathered rats of course is tax credits. With a clawback rate of up to 41p in the pound, someone earning a shade over the NI primary threshold (say £140 per week) would be paying a combined marginal rate of tax of 76.3%. The effective rates of tax that such clawbacks amount to is an inevitable consequences of tapering any benefit over a given income range. Not that I’m about to write an exposition of alternatives, such as negative income tax…

… at least not for now. It’s nearly time for PMQs, then the fun really starts.

(Usual caveat: you’re probably not a paying client, so be aware that all the figures above could be fundamentally flawed by my rushed arithmetic and need to be doing a proper job in the meantime….)


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