DO TOP INCOME EARNERS PAY THE TOP TAX RATE? WITHDRAWAL OF TAX CREDITS LEAVE PEOPLE ON LOW WAGES PAYING 73% MARGINAL TAX RATE, AND ON MODERATE WAGES PAYING 83% MARGINAL TAX RATE.

Reposted from Ripped Off Britons

The LibDems and Tories squabbled over who should get credit for the increases in the personal tax free allowance(Personal Allowance), which rose from £6,475 in 2010/11 up to £10,000 in 2014/15.
Whoever did it, did it mean low paid people got to keep all their income to spend as they will? Of course not!

For people receivingWorking Tax Credits, who may or may not be getting Child Tax Credits too, their tax credits are clawed back at the rate of 41 pence for every pound (i.e. a 41% withdrawal rate) above an income threshold of £6,420. Note this applies to a household’s joint income rather than on an individual basis.
As a result, people on low and moderate incomes can effectively be taxed at a marginal rate higher than those with the highest incomes.

The following examples are based on a tutorial from the ACCA(Association of Certified Chartered Accountants):
[Note, a pay increase up to £5,000 or a paydecrease up to £2,500 in one year only impacts tax credits in the following tax year].

Example 1) Alex, a single person with no children, works 40 hours per week and earned £10,000 during 2013-14.

  • In 2014-15 the maximum tax credit for Alex would be £2,740 (£1,940 basic + £800 working element)
  • Working tax credits are clawed back at the rate of 41% above an income threshold of £6,420
  • Alex earned £10,000 per annum in 2013-14, which is £3,580 above the income threshold (£10,000 – £6,420 = £3,580).
  • Alex’s tax credits are reduced by 41% of £3,580 = £1,468
  • This leaves Alex with tax credits = £2,740 – £1,468 =£1,272

What if Alex had earned an extra £1,000 in 2013-14? This affects his tax credits for the next tax year, 2014-15. Therefore for 2014-15 he would lose from this extra £1,000

o       £410 of tax credits = £1,000 x 41%

o       £200 in income tax = £1,000 x 20%

o       £120 in national insurance = £1,000 x 12%

o       Total deduction = £730

Thus Alex pays a marginal tax rate of 73%

Example 2) Zoe, a single person with two children, works 35 hours per week and earned £45,000 during 2013-14.  She pays £300 per week for child care.

  • In 2014-15 the maximum tax credit for Zoe would be £21,695
  • Working tax credits are clawed back at the rate of 41% above an income threshold of £6,420
  • Zoe earned £45,000 per annum in 2013-14, which is £38,580 (£45,000 – £6,420) above the income threshold.
  • Zoe’s tax credits are reduced by 41% of £38,580 = £15,818
  • This leaves Zoe with tax credits = £21,695 – £15,818 = £5,877

What if Zoe had earned an extra £1,000 in 2013-14?

Then in 2014-15 she would lose

o       £410 of tax credits = £1,000 x 41%

o       £400 in income tax = £1,000 x 40% (higher rate)

o       £20 in national insurance = £1,000 x 2% (NI rate 2% on earnings above £41,444 p.a.)

o       Total deduction = £830

Thus Zoe pays a marginal tax rate of 83%
In April 2015 the Financial Times’ article “Million face 60% UK income tax ‘trap’” bleated about those earning over £100k paying a marginal rate of 60%, due to the progressive loss of the Personal Allowance (losing £1 of Personal Allowance for every £2 of income over £100k).

Evidently taking 60% from the rich is more newsworthy than 73% from the poor.

SOURCE HIGH PAY CENTRE: One Law For Them – The runaway growth of executive pay

Leading economist Gavyn Davies has argued that low wage growth accounts for more than two thirds of corporate profits since the 1980s. As a substantial proportion of these profits have been used to pay dividends to shareholders, executives (who are directly paid in restricted shares) have directly increased their pay at the expense of their workers.

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One Response to DO TOP INCOME EARNERS PAY THE TOP TAX RATE? WITHDRAWAL OF TAX CREDITS LEAVE PEOPLE ON LOW WAGES PAYING 73% MARGINAL TAX RATE, AND ON MODERATE WAGES PAYING 83% MARGINAL TAX RATE.

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