Ahead of the November Budget, mutual insurer Royal London is calling for the UK tax system to be rationalised following new analysis showing that around 775,000 people pay more tax on each extra pound that they earn than a millionaire.
Under the current UK income tax system, the amount of tax paid on an extra pound is intended to rise steadily as incomes rise. Those under £11,500 pay no tax, those up to £45,000 pay tax at 20p in the pound, those up to £150,000 pay 40p in the pound, and those on higher incomes – including millionaires – pay 45p in the pound in income tax for each extra pound that they earn.
But new analysis by Royal London has shown the large number of people not in the ‘Millionaire’s Club’ who can lose anything from 60p to 70p in the pound because of a series of complications which have been introduced to the tax system over recent years.
These complex rules have created a series of anomalies where people who are not the ‘super-rich’ can lose more of any extra cash they earn in tax than a millionaire.
Steve Webb, director of policy at Royal London, said: “Most people would agree that as people earn more they should pay a higher rate of tax. But a series of complex changes which have been bolted on to the tax system over recent years mean this is no longer true.
“This analysis shows that there are hundreds of thousands of people who pay more tax on each extra pound that they earn than a millionaire – in some cases losing 60p or 70p in the pound. It is hard to believe that this is a sensible way to run a tax system. As part of his Budget, the Chancellor should be looking to rationalise the tax system so that is simpler, fairer and easier to understand.”
Royal London found that the three key groups are:
1) Parents where one partner earns between £50,000 and £60,000 per year – since January 2013, this group loses one percent of their child benefit for each £100 per year that they earn above the £50,000 floor; a couple with two children on £50,000 per year receives £1,789 per year in child benefit; if the higher earner earns £51,000 they lose 10 percent of their child benefit or £179. The extra £1000 costs them £400 in income tax, £179 in child benefit, and £20 in National Insurance or £599 in total. This is a tax rate of 59.9 percent; it is estimated that 375,000 people are in this category
2) People who earn between £100,000 and £123,000 – those earning under £100,000 per year benefit from a tax free personal allowance of £11,500 per year; beyond the threshold of £100,000, the tax free personal allowance is ‘tapered’ at a rate of 50p in the pound; for example, someone earning £101,000 has £1,000 above the threshold so loses £500 in personal allowance; this is an extra £500 which is now taxed at 40 percent, increasing their tax bill by £200; overall, the extra £1,000 costs them £400 in income tax, £200 in lost personal allowance and £20 in National Insurance or £620 in total; this is a tax rate of 62 percent; it is estimated that around 250,000 people are in this category
3) People with total taxable income (including employer pension contributions) between £150,000 and £210,000 per year – those on lower incomes can contribute £40,000 per year into a pension and benefit from tax relief; above the £150,000 threshold, this ‘annual allowance’ is reduced at a rate of 50p in the pound; many people in this income band will be paying tax at 45 percent, so a reduction of 50p in the annual allowance will mean an additional 22.5 percent in tax; including National Insurance Contributions, this means a tax rate of 69.5 percent; it is estimated that around 150,000 people may be affected.
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