A guest post from Harry Benson of the Bristol Community Family Trust.
My friends humour me when I ask them who pays the highest rates of tax. Astonishingly, the correct answer is families on low to medium income who get to keep just 30p of every additional £1 earned. The marginal tax rate is thus an eye-watering 70%.
This seems so absurd that it’s hard to believe it could possibly be the case. Until last week, it had been a mystery to me how the tax credits that my own family are awarded each year vary with our household income. I knew from my family policy work that marginal tax rates can be high. All I originally wanted to find out was exactly how much of my wife’s modest salary as a cookery teacher she would keep if she worked a few more hours. By varying my inputs, the very helpful new BBC budget calculator told me that her net pay would plummet below minimum wage. I had to humour myself at this point and assume the BBC must have made a mistake. Alas a cross-check with HMRC confirms that the calculator is right.
Here’s how it works. Take the situation of a couple with two children and a combined income below national average during 2008-9 of anywhere between £10,000 and £25,000. For each additional £1 that they earn,
- they pay 20p more income tax
- they pay 11p more national insurance
- they receive 39p fewer tax credits
All this is cumulative. 20 + 11 + 39 = 70p. So here’s the shocking reality that I haven’t heard any politician mention on the Today programme. The 39% withdrawal rate of tax credits has a far bigger effect on families earning below average income than the 20% income tax rate (31% including the income tax masquerading as national insurance). The current system of tax credits thus disincentivises work and adds to the poverty trap.
Everyone has been talking about the rich who will pay 50% tax (61% with national insurance). What about the poor who are already paying 70% tax? Work an extra hour for a minimum wage of £5.73. You take home just £1.72. I am horrified.
Am I the last person to figure this out? Or is this an issue that has been completely and scandalously overlooked?
