As the Telegraph noted this weekend:
While Chancellor George Osborne insists benefit reforms are designed to help hard-working families, new rules which take effect on Saturday will mean that some of the poorest people in the country pay marginal rates of tax that are half as high again as those paid by millionaires.
Many on the minimum wage will be left with just 27p in each additional pound they earn.
Except they got that wrong. As Paul Lewis has shown, the likely tax rate is 81%. And it may be higher when council tax charges and graduate payments are taken into account.
But apparently the 50p tax rate was a disincentive to work.
The idea that there is one rule for the rich and another for everyone else is well rooted in fact.
NB: A paper I have written on this issue with Howard Reed is coming, soon, I hope.
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Assuming you’re not advocating 81% + for the rich (what top rate >would< you have?)…..
….. I'm not a good enough tax accountant to know how the marginal rate can be reduced to a sensible level. Could you help me please?
As I say – that’s to come, soon
I know this is going off subject a little, but why is it never discussed that utility bills are basically an income tax? and that rate of tax can be as high as 50% for people with the lowest incomes. We live on a cold island off the the coast of Northern Europe, being able to stay warm is a necessity not a choice, and the poor are having to pay half of their income for the privilege of light and heating.
I apologise for that rant, but it’s something that needs to be addressed, I’ve got a family member who is in her late 50’s who has worked all of her life, and now finds herself in the unfortunate position of not being able to continue doing that through ill health, apart from the disgusting treatment she’s having to endure with the DWP and the corporations they lavish money on so they can attempt to deny her what she’s entitled to, she has almost half of what she does get going straight to energy companies. By the time she’s paid her bills she’s got just over £30 for food and other necessities (or one breakfast for Ian Duncan Smith).
Richard, I’ve posted this before on another site, but I can speak from my own experience of the way in which those on benefits pay the highest rates of marginal tax – in my case MORE than 100%! Yes! I was a Councillor on the L.B. Barnet between 1994 and 1998, and was effectively unemployed the whole time I was on the Council (except for periods on Training for Work, 3 months in 1995; 6 months October 1996 to May 1997, when I was doing my 1st 6 pupillage, and a period in late 1997 to early 1998, when I was trying to put together a portfolio career made up of working with a family tax planning company, work with an IFA in compliance, and with some volunteering in a Law Centre).
However, I have in front of me my P60 from L.B.Barnet for Tax year 1996-97, when I “earned” £1,859 on which I paid £446.16 in PAYE. However, that was NOT the end of it: the “earnings” were actually effectively from an Attendance Allowance – in my day, Councillors did NOT get “salaries”. I received £16.00 for attending a normal Committee, and £21.00 for attending Full Council. However, when I signed on, I had to declare this “Have you done any work, paid or unpaid or voluntary work in the last fortnight”. NOTE, ALL the Committee Meetings were in the evening, so I could NOT be said to be “unavailable for work”, one of the criteria for eligibility, the other being “actively seeking work” (I did over 400 applications in the time I was signed on!)
For each day I reported I was docked my JSA of £12.00 or so for that day, so my £16.00 was close to zero. If I had more than 2 Committee Meetings in a week, I also lost my National Insurance Credit for the week, and my Income Support! In other words a quadruple taxation of more than 100%
I asked the Head of Legal if I could decline to take payment, and was told that, according to Social Security Regulations, a Councillor was deemed to have received any re-imbursement to which he or she was due! So I had to take it, as it was at least SOME cash in hand, but…!!!
One further point: these rules did NOT apply to persons doing jury service = no failure to meet the eligibility criteria, and so no penalization/sanction in the form of loss of JSA. This really angered me, since I was in an exactly parallel situation with a juror – selected/elected by the public to carry out public service in the interests of society, and in particular the electorate in my Ward. I see I have written this in large letters on some of my JSA Claim forms “This is public service”. Signing on really was an experience causing my blood pressure to rise, and sickness and stress to be the result, so that I tried ever thereafter to avoid it. Those who are stuck on it for years – there’s a man used to come every into my local library, and had done so for over 18 months, always looking for work: God grant he’s found work by now, as I haven’t seen him for quite some time. But he REALLY struggled EVERY day to find work – definitely NOT a scrounger, but a real striver.
The 45% vs >80% comparison is invalid. PL’s number (including all thaws and withdrawals) is a sensible one to use, but you should be comparing it to the equivalent figure at the top end (rather than income tax alone). I’m not sure why you’ve used the comparison you have (before the predictable critics weigh in, it seems unlikely to be dishonesty, my gut feeling is that using the correct givures there’s still a substantial gap in rates)
So what other taxes should I consider? 2% NIC for some I agree. There is nothing else. If you suggest employer’s NI that has to be added at the lower end too. And loss of beenfits and allowances are not a marginal issue at 45% of any consequence.
So I’m not sure what you’re implying
NI was what had sprung to mind when I posted, and may well be the only thing missing (I agree employer NI shouldn’t be included, as it isn’t in the PL number, ditto student loans). Depending on your definition of ‘rich’, the (very silly) personal allowance removal might be in scope.
I’m not really disagreeing with your substantial point, only your choice of stats, largely because
A) This sort of thing gives me the same sort of mental twitch as seeing people misuse the apostrophe,
B) These are important issues that deserve quality discussion, and you can’t have that with bad data, and,
C) It provides oppertunities for Worstall-sequence snark, a commodity of which the Internet already has a surfeit.
I’d agree if I was wrong
Richard, unless you have some argument that NI should properly be excluded, or an exciting new proof that 45=47, I cannot see how you could be otherwise.
(PS in the above post, for ‘Worstall-sequence’, read ‘Worstall-esque’, I have an over enthusiastic autocomplete)
You assume most income subject to top rate tax is under PAYE. There is no reason to do that – just as I have not made some possible assumptions on the income of those loosing benefit payments
As such my argument is entirely reasonable even if it would not hold true in every case
Only a pedant would disagree
I’m not sure anyone disagrees with the idea that effective marginal rates are way too high at the lowest levels. And I mean, quite literally, *anyone*. That there is this disparity is not a result of anyone deciding that the rich and the poor will respond differently to the rates. It’s just where years of tinkering has taken us.
I confess, I don’t know a great deal about how all the benefits and tax credits interact to deliver these awful results. I do know that it’s an unholy mess, for which successive governments are to blame (even where their intentions were good), and I know that a stated aim of the reforms is to deal with the issue. Are you telling me that Universal Credit is, by design, going to increase benefit withdrawl rates in some cases?
Or is it other reforms (e.g. council tax) that cause the problem?
Graduate payments probably shouldn’t be taken into account if your intent is to attack the tories, as they are going to be lower than they were before.. and as they don’t kick in until 21k of income, I’d expect that anyone paying will be well away from the level where the killer withdrawl rates are. Though I may be wrong.
What’s the answer? Well, again, it’s hard to get beyond a citizens income, isn’t it? If you simply scrap as many benefits as possible, and replace them with a single (and universal) payment, then there is nothing to withdraw.
Again – can you wait until I get a paper out?
Richard
Wonder why an FCA would try and compare income tax rates with marginal income tax rates? Was all that training for nothing?
The marginal income tax rate over £150k is 45%
What arte you arguing – otherwise?
sounds like sophistry to me!!!
No – you made an accusation
Please back it up
Nope, I asked a question. No one pays an income tax rate of more than 80% in this country, as you well know. And marginal rates are somewhat dependent on circumstances; again as you well know. And as it happens the marginal rate on taxable incomes above £150K is not 45%
Your comment is not even worthy of comment it is so stupid