New 60% tax rate created in the budget?

[djm4]

To expand a little on my most recent tweet:

One thing the budget announced was to reduce the personal allowance of anyone earning over £100,000 at a rate of £1 for every £2 over £100,000 until completely withdrawn. This seems to have gone a little unnoticed by most commentators, and indeed I've had trouble finding links to the details of the plans, not least because they seem to have changed sine the pre-budget announcement. (It's section A8 in the BBC's complete budget report, but even this doesn't really give any more details.)

Now, I don't earn over £100,000, and am unlikely ever to. But I think this bears a closer look, particularly given the '50% Tax Rate!' headlines in pretty much every paper at the moment.

Let's say I'm earning £100,000, ad I get a £100 pay rise. £40 of that goes in tax immediately. However, I also lose £50 of my existing personal allowance, so now have to pay tax on it. Assuming I'm paying tax on it at the full 40% (and I admit I may be wrong on that, because I can't find any figures), that's an extra £20 of tax, which means that a full £60 of my £100 pay rise has gone in tax.

That's a marginal tax rate of 60%. (Even if I pay tax on the £50 at 20%, it's a tax rate of 50%). Which means that there's suddenly an extra tax band create for anyone earning between £100,000 and around £113,000. The UK tax bands will go:

* £0 - personal allownace: 0%
* personal allowance - £34,800: 20%
* £34,800 - £100,000: 40%
* £100,000 - £113,000: 60%
* £113,000 - £150,000: 40%
* £150,000 and above: 50%

It seems unfair that someone earning £110,000 should be taxed at a higher effective rate than someone earning £120,000, let alone someone earning £160,000.

Have I got my sums wrong, or missed something fundamental about how the income tax system in the UK works?

Comments

[karen2205]

Oooh, I completely misheard that bit of the announcement, thinking it applied only to those aged 65+ with a higher personal allowance, where there's already provision for the extra allowance to be withdrawn when someone's income is above a particular level.

And yeah, your calculations seem right and the whole thing seems illogical - if you want to withdraw someone's personal allowance then that should kick in at a later point that the highest marginal tax rate.

Hmm, on the other hand, what's the effect of the Upper Earnings Limit for NI contributions on your calculations? UEL = £844/week. £844 × 52 = £43 888 - ahh, so not at all relevant when looking at £100k+ salaries as the effect has already happened.

ST (ie. point at which you start to pay NI contributions at 11%) = £110/week £110 × 52 = £5 720

So incorporating NI + assuming under 65 you get:

£0 - £5720 = 0%
£5721 - £6475 = 11% NIC
£6476 - £41 275 = 11% NIC + 20% income tax
£41 273 - £43 888 = 11% NIC + 40% income tax
£43 888 - £100 000 = 1% NIC + 40 % income tax
£100 001 - £113 000 = 1% NIC + 60% income tax
£113 001 - £150 000 = 1% NIC + 40% income tax
£150 001 + = 1%NIC + 50% income tax

So, if that's right, there's also a point where salaries between £41 273 and £43 888 are also taxed at a higher marginal rate than those between £43 888 - £100 000.

I wish I could redesign the tax system to be more sensible and logical.

[djm4]

Thanks for the extra information about National Insurance - I really didn't feel able to look at that as well.