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Sunday, December 5, 2021

How to know if you are paying 60pc, 70pc or even 100pc tax

A family with three children faces paying tax at an effective rate of around 65pc on earnings between £50,000 and £60,000 because of the effect of the tax charge. 

Stuart Adam of the Institute for Fiscal Studies think tank said “weird and arbitrary tinkering” from various administrations had created complexities. 

“In the case of child benefit. It is now possible for a basic-rate paying family to be paying a tax charge designed initially for only the highest earners – the very opposite of its design.” 

This is because the £50,000 cap has not risen with inflation and has remained frozen, whereas the point at which higher rate tax starts has risen to £50,270. 

In another example of hidden marginal tax rates, those earning £100,000 a year face paying tax, not at 40pc as you would expect, but at 60pc on a band of their earnings, as this is the point at which the Government begins to withdraw the £12,570 tax-free personal allowance.

For every £1 earned over £100,000, the state reduces the allowance by 50p. The result is that each additional £1 of income effectively incurs 60p of income tax, as the chart shows. Once National Insurance is factored in, the true rate is even higher. Rates of NI are increasing by 1.25 percentage points from April. 

Earnings of more than £125,140 are taxed at 40pc again, as the distorting effect of the personal allowance clawback is lost. Those who earn more than £150,000 pay 45pc.

The vertical line which goes off of the chart illustrates the point at which the marriage allowance, worth £252 per couple (as long as one of you is not a taxpayer and the other pays 20pc), is lost, as the earner’s income enters the higher 40pc bracket. In effect £1 extra earned costs the earner £252.

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