More people now pay 51% direct tax on their earnings

One point that has been overlooked so far is the damaging effects on opportunity for middle earners.  The Chancellor yesterday reduced the higher rate threshold of income tax from £36,000 to £35,400.  Reform’s latest report on social mobility raised the idea of ‘mobility blocks’ – key points in the tax and benefits system that undermine mobility.  The upper rate threshold is one of these blocks.  Adding on National Insurance Contributions, the Chancellor moved thousands more people into the position of paying 51 per cent direct tax on their earnings.

Comments

[C Powell]

Increasing the basic rate threshold by £600 means that everyone gains £120 (i.e. 20% of £600). But for higher rate taxpayers, they are now paying 40% tax on an additional £600 i.e. £240 so everyone who is on higher rate tax - and remember that as a result of yesterday more people (How many? Has anyone calculated?) are now higher rate tax payers -will pay more tax. Brilliant. Added to that the NI thresholds have been changed so that we're paying more. So middle income earners have been hit, a million of the poor haven't been compensated and we'll all have to pay more in the end to finance this unfunded tax cut.

[James Burdett]

Andrew, according to the HMRC press release the new threshold is 34,800 not 35,400. So either Darling was lying in the House or the HMRC are lying on their press release.

[Mac]

If the new threshold is 35400 higher rate tax payers will be 120 better off. If it is 34800 they will be 120 worse off.

Looks like we have been misled again.

[James Burdett]

Mac - For 40% payers if the band had been left unchanged they would have gained £120 from the personal allowance increase effectively changing tax on an extra £600 pounds from 20% to 0%. They would then have gained another £120 from the extra £600 pounds being charged at 20% as opposed to 40%. So a reduction in the band by £600 as the chancellor announced in his statement would have removed the gain from the extra £600 then being in the lower rate but by reducing the band by £1200 pounds as in the press release reduces it by both gains. So 40% taxpayers gain or lose nil. When one considers that as a result of the changes announced yesterday the new 40% threshold is 34,800, the threshold for tax year 2007/08 was 34,600 so effectively Darling has reversed the indexation of the 40% band.

[Critical eye]

a) Tosh. 'Blocks'? What rubbish.

b) 'Thousands more' people pay 51% NI+ICT? Really? Do you want to check what the rate of NI+ICT is for top rate payers at the moment? If they have moved the top rate threshold below the UEL, they will have *introduced* a 51% band.

p.s. Reform are probably the worst centre-right think-tank.

[Bexie]

DOnt think they have their sums right. I checked with the tax calculator my accountant provides and got the following
Monthly 1,000 1,500 2,000 3,000 4,000 5,000 8,333 16666.66667
Take Home 830 1,175 1,520 2,210 2,857 3,447 5,414 10330.76333
Tax and NI 240 459 678 1,116 1,597 2,135 3,928 8411.252667
Tax as % of Gross 23.95% 30.57% 33.88% 37.18% 39.91% 42.69% 47.14% 50.47%

Excuse the formatting, but to me it seems that on a basic personal allowance one would have to be earning more than 200k a year, and paying the full whack of both employers and employees NI fraud contributions for this to apply.

[Mark Wadsworth]

What James Burdett says, thanks James.

[Andrew Haldenby]

What a brainstorm! I'm sorry and I appreciate these critical comments. I should have made the simple point that the higher rate threshold has moved towards average earnings.

[John Moss]

On the specific point, I thought Brown had aligned the upper limit for NI with the threshold for higher rate tax, thus removing the window where NI was paid in full (11%) and tax paid at 40%? If Darling's measures have changed that it is a true mess.

What should be happening is that the effective combined tax rates are now, 0% below the starting rate, 31% between starting rate and the threshold for top rate, then 41% above that as only the 1% additional NI from 2001 is paid on all income.

It would be utopian if there was a large chunk of "free pay", then a single rate of tax, as this would produce a perfectly progressive increase in the rate of tax paid as a percentage of earninsg, from 0% at the point ones earnings were at the very top of the free pay threshold, right up to the notional rate at infinite earnings.

Moving towards this is welcome, but a key factor in that is taking NI and turning it into hypothecated/voucherised contributions to be paid over to insurers to cover pension, healthcare and loss of employment.

That's probably why it will never happen.