Tax query...

[Nitefly]

Sorry I completely fabricated my bands! Good lord But the principle was correct.

I find it easier to compare the current system with one that doesn't include a PA withdrawal scheme. So

If no PA Withdrawal existed
Income: £105,000
Less PA (£10k) = Taxable Income: £95,000
Tax: £31,865k at 20%, £63,135 at 40%
Amount paid @ 40% rate = £25,254

As it stands
Income £105,000
Less PA (£7.5k) = Taxable Income: £97,500
Tax: £31,865k at 20%, £65,635k at 40%
Amount paid @ 40% rate = £26,254

That's not a comparison that shows anything though? You have to figure out as a percentage how much tax you are paying for every £1 you earn over £100,000. You therefore have to compare it to the tax you pay at £100,000 to find the marginal tax payable over £100,000.

My example using the bands you have used above (still using a rounded PA):

Scenario 1
Income: £100,000
Less PA of £10,000 = Taxable Income: £90,000
Tax: £31,865 at 20%, £58,135 at 40%

Scenario 2
Income £105,000
Less PA of £7,500 = Taxable Income: £97.5k
Tax: £31,865k at 20%, £65,635 at 40%

In scenario 2 you are earning £5,000 more than in scenario 1 but are paying an additional £3,000 in tax. That is a marginal tax rate of 60%.

 

[dowie]

I don't see how the PA withdrawal can ever equal a 15 percentage point hike.

It can be illustrated very easily for you here:

http://listentotaxman.com/index.php

whack in 100k salary... look at the figure for tax... about 29,822

add on 10k of salary...

watch that figure increase by 6k to 35,822 when you increase the salary from 100k to 110k

you end up in an effective 60% bracket for the first 20k you earn over 100k as a result of your personal allowance eroding.

 

[bloodline76]

So what is the answer again? lol

 

[estebanrey]

OK, OK I get what you're saying. I still don't think that the 'right' way of looking at it though.

Saying you are paying 60% in tax between 100k-120k is jiggery-pokery with numbers, in reality, and more accurately, you are paying 45% on more of your income. Saying someone is paying 60% in tax between 100k-110k implies (and to most people would mean) you were paying more in tax in that window than you are taking home; but you're not.

 

[Nitefly]

For every pound you earn between £100k to ~£120k, you are literally due to 60p in tax.

I think we've reached the end of this road

 

[SS-89]

So what is the answer again? lol

The government wording in the budget doesn't help (i.e. basic rate limit vs higher rate threshold).

Essentially the basic rate limit (31,865) includes the deduction of 10k of personal allowance whereas the higher rate threshold doesn't hence the difference being exactly 10k.

So:

0-10k tax free
10k-41,865 (20%)

Subsequent pay after that is taxed at 40% up to 150k (though as discussed personal allowance extinguishes at £1 for every £2 over 100k).

 

[estebanrey]

For every pound you earn between £100k to ~£120k, you are literally due to 60p in tax.

I think we've reached the end of this road

No, you're not. You are 'literally' paying 40% on more of your income. Or rather you are paying 40% but getting less back for free.

 

[Phantom Shadow]

No, you're not. You are 'literally' paying 40% on more of your income. Or rather you are paying 40% but getting less back for free.

Yes, that it what happens. But people tend to thing of an increase in earnings as to how much EXTRA tax are they going to be paying. Hence marginal tax rate, if I earn an extra £1 how much of that is then paid in tax. 60p, the marginal rate of tax is 60%.

People don't really care how much 20%, 40% and 45% tax they pay, what they want to know is how much more tax will they be paying for an increase in salary.

I don't think you understand the concept of marginal.

 

[estebanrey]

Yes, that it what happens. But people tend to thing of an increase in earnings as to how much EXTRA tax are they going to be paying. Hence marginal tax rate, if I earn an extra £1 how much of that is then paid in tax. 60p, the marginal rate of tax is 60%.

People don't really care how much 20%, 40% and 45% tax they pay, what they want to know is how much more tax will they be paying for an increase in salary.

I don't think you understand the concept of marginal.

I understand, I just think it's odd logic. I agree with your second paragraph but that doesn't describe the 60% marginal rate because the extra you are paying in tax should be 'total paid after increase - total paid before increase' (which in my £100k-£105k example is just over 1 percentage point). The 60% figure comes from isolating one portion of your entire salary (only the bit between 100k and 120k) and ignoring the total, why would you ignore the total tax paid if you are concerned with how much extra tax you are paying?

As I said, claiming people are paying 60% of tax between £100-£120k implies to most people that in that window you are taking home less than you are paying in tax but that isn't true.

I can understand why personal accountants would want to add it up like that so it looks like their client is being hard done by in some way but that doesn't make it disingenuous.

 

[Pudney]

I can understand why personal accountants would want to add it up like that so it looks like their client is being hard done by in some way but that doesn't make it disingenuous.

That's not the reason at all. It's because if someone says, I'm being paid £100k at the moment and they want to give me a £5k bonus, what's the tax on that, it's easier to say:

£5k x 60% = £3k

Than it is to say:

£5k x 40% = £2k
£2.5k reduction in PA x 40% = £1k
Total = £3k.

 

[cheesyboy]

I understand, I just think it's odd logic. I agree with your second paragraph but that doesn't describe the 60% marginal rate because the extra you are paying in tax should be 'total paid after increase - total paid before increase' (which in my £100k-£105k example is just over 1 percentage point). The 60% figure comes from isolating one portion of your entire salary (only the bit between 100k and 120k) and ignoring the total, why would you ignore the total tax paid if you are concerned with how much extra tax you are paying?

As I said, claiming people are paying 60% of tax between £100-£120k implies to most people that in that window you are taking home less than you are paying in tax but that isn't true.

I can understand why personal accountants would want to add it up like that so it looks like their client is being hard done by in some way but that doesn't make it disingenuous.

I'd say keeping only 40% of any pay rise is being pretty hard done by - I don't care how much you earn.

Here's a fun one - what happens when you have 8 kids and get a pay rise from £50k to £60k?

Well, you actually take home less net pay than you did when you were earning £50k.

Tax on the £10k of earnings between £50k and £60k;
40% income tax
2% national insurance
59% clawback of child benefit (weekly £20.30 + (7x £13.40) = £5,933pa = 59% of £10k)

101% total marginal tax rate!!!

Tory government looking after hard working families? Can't imagine many people work harder than someone with 8 kids and a £50k-£60k job - and they are truly getting ****** in the ***

 

[estebanrey]

I agree Pudney that makes the calculation easier, what I am saying is disingenuous is for that person to then claim they are "paying" 60% in tax between £100-£120k.

A decrease in the PA isn't an increase in what you pay, it's a decrease in the amount you get back for free.

It's about perception I guess, if you see the tax free allowance as an amount you subtract first before you apply tax then you get the situation you guys are describing. If however you look at it as an amount you get back at the end after the deduction (which IMO is more accurate) then you pay the same in tax.

The problem with the 60% rate calculation is that it is defining tax as "my salary minus the amount that isn't tax" which is inaccurate IMHO. It should be "the amount as a percentage on each pound I earn that goes to the treasure". In other words, it's not that people one £120 have paid 60% in tax after £100k, it is that they are paying the full 40% whereas someone on £100K has effectively paid less than 40%.

 

[Phantom Shadow]

You're still mixing up marginal tax rate and average tax rate. Most are probably aware that their average rate of tax at that point would be 40 something percent, but that they would only see 40% of a bonus in their pocket.

It's about perception I guess, if you see the tax free allowance as an amount you subtract first before you apply tax then you get the situation you guys are describing. If however you look at it as an amount you get back at the end after the deduction (which IMO is more accurate) then you pay the same in tax.

The tax free allowance is deducted before you apply tax. Therefore a decrease in PA is an increase in what tax you are then due.

 

[Kemik]

Pudney is correct. It's effectively a 60% marginal tax rate on £100k to loss of PA.

 

[Spook187]

Pensions and possibly child care vouchers etc can reduce your taxable salary.

Only when Workplace pension starts, and no kids.

Does my slip look right or wrong.

 

[estebanrey]

Pudney is correct. It's effectively a 60% marginal tax rate on £100k to loss of PA.

Again, it's perception. You say it's effectively a 60% tax rate, I say it's the full 40% rate and everyone else is effectively getting a discount.

Think of of this way, if there is a 3 for 2 deal on a pack of butter that costs £1 and you only by one, do you see that as effectively paying 33p over the odds? Or do you see as paying what it's worth and just not getting the discount?

I'd say keeping only 40% of any pay rise is being pretty hard done by - I don't care how much you earn.[/B]

Someone on over £100k is hard done by? Really?

I'd agree with your sentiment if we had a perfect linear wage structure and meritocracy but we don't. How can you explain the falling of wages for those under £100k whilst those over have been going up by far more than inflation for the last five years?

I simply can't agree with the idea that the withdrawal of the PA is punishing the successful, it's the wrong way around. The PA in a perfect world wouldn't exist at all, it's used by the government to compensate for the fact businesses seem unable to implement fairer wage packages for those at the lower levels. It exists because otherwise getting a job for some people simply wouldn't be worth it.

 

[SpeedFreak]

It's not a perception when you get a 1k payrise gross and see your take home go up by an additional 400 quid. That would be more of a fact, which is all that really matters.

 

[estebanrey]

It's not a perception when you get a 1k payrise gross and see your take home go up by an additional 400 quid. That would be more of a fact, which is all that really matters.

It's a perception because you are assuming the PA allowance is some kind of right, that it is the default position and by losing it you are then paying more when you're actually get less of a discount. Whilst mathematically they may equate to the same thing, philosophically they aren't.

It's also a perception because the fact is you are not paying 60% in tax on amounts between £100-£110. You are actually paying more on the whole 40% range and you are deliberately pretending you're not by calculating the same amount between 31k-100k and shoving whole increase into the 110-120 window, but it doesn't.

The fact is someone on £120k pays less in Income Tax than they don't, for every single pound because the average tax rate is clearly the most mathematically honest way to look at it. It is similar to the Simpons Paradox where you have two options and depending on how you calculate them you can claim both are the best options, but one of those ways is a disingenuous calculation (and similar to to 60% marginal rate argument IMO).

 

[Destination]

The fact is someone on £120k pays less in Income Tax than they don't, for every single pound because the average tax rate is clearly the most mathematically honest way to look at it.

Earn £120,000 in 2013/2014 and you'll take home £72,787. This means £6,066 in your pocket a month.
Over the year you'll pay £41,598 income tax and £5,615 in National Insurance.


Still a bloody large amount they are paying as an overall of their income.
Nearly double average salary in taxes alone.

 

[estebanrey]

Earn £120,000 in 2013/2014 and you'll take home £72,787. This means £6,066 in your pocket a month.
Over the year you'll pay £41,598 income tax and £5,615 in National Insurance.


Still a bloody large amount they are paying as an overall of their income.
Nearly double average salary in taxes alone.

But again, that is because we have a lopsided wage structure in most businesses where the top earners are making 100s of times more than the lowest earnings, so instead of capping salaries or regulating pay, we do it by taking more tax than those in position whereby they have a much greater influence over what they get to give back to those who have very little.

If we had a society where those at the bottom earned enough to live fairly comfortably and those at the top able to never struggle and enjoy a few of the finer things in life, where the person at the bottom is paid no less than 10-20 times those at the top I'd happily support no PA and a flat rate of tax. Unfortunately we don't though.

Bob Diamond for example was asked if he was really worth 1,000 times one of his cashiers (his salary £20m, theirs £20k) and he went on for about a minute explaining why he thought his salary was appropriate but couldn't, or rather wouldn't say he was worth a thousand times one of the tellers (because clearly he isn't).

Anyone who gets butthurt because they are paying more in relative terms of tax whilst enjoying the ability to easily get mortgages, eat luxury foods and drive expensive cars needs to assess their outlook on life.