Vir Cantium

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Tag Archives: national insurance

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….)


Forget Tinkering with PAYE, George: Just Scrap National Insurance

It's an elephant, and it's probably in a room. I thought it was cuter than the real thing, though.

About ten days ago, we learned that the Conservatives were thinking of scrapping the PAYE system. Tax will be deducted via the banking system, it seems, relieving employers of having to act as unpaid tax collectors. The PAYE system is under strain from the number of people who change jobs more regularly, and have multiple sources of income, all combined with the general complexity of the tax system these days.

I can only assume that the policy is at an “embryonic stage”, as details were thin on the ground. Nevertheless, it is worth testing just how radical or effective such a policy would actually be, even though the objective of reducing burdens on business is a sound one.


Let’s start with the employer’s position. Obviously an employer will still have to calculate the amount of pay due for the month or week. Those records will still have to kept as part of his/her proper accounting records, as well as to satisfy various employment regulations. If an occupational pension scheme is in place, a staff loan, or attachment of earnings order for example, then those deductions will still have to be calculated and recorded. What of statutory payments such as Statutory Maternity Pay, which is based on earnings levels, and the compensation that is reimbursed to the employer? Such amounts will still have to be accounted for and recorded. Shall I mention the taxation of benefits in kind, such as company cars or medical insurance?

Then let us not forget Employer’s National Insurance – the tax on jobs. How would this be accounted for and paid over without a payroll system looking pretty similar to those of today? Add into the mix the number of employers these days who use computerised payroll systems – even if it’s the software that HM Revenue & Customs (HMRC) provides – and the question is how much administrative burden will actually be removed from businesses by this move?

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