djm4: (Default)
Thursday, April 23rd, 2009 11:26 am
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the personal allowance of anyone earning over £100,000 at a rate of £1 for every £2 over £100,000 until completely withdrawn.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?