Aug 2011 19

Forget 20p, CPS report says, tax on income at basic rate is over 40p11

The Centre for Policy Studies (CPS) have published a factsheet today on how much tax you really pay on your income. Ryan Bourne smashes the myth that tax rates in Britain are just 20, 40 and 50 per cent by combining the various taxes on income into a single “marginal effective tax rate”.

Income Tax, employees National Insurance and employers National Insurance are all combined and adjusted to calculate how much marginal tax people really pay at various levels. The results are a lot higher than most of the comment in the media would lead you to believe.

The real basic rate is 40.2p, not 20p. The real higher rate is 49.0p, not 40p. And the real additional rate is 57.8p, not 50p. But it gets worse than that. Those earning between £100,000 and £114,950 face a rate of 66.6 per cent because in this range £1 of the personal allowance of tax free income is withdrawn for every £2 earned at the same time as having to pay Income Tax and both National Insurance rates.

Worst of all, the greatest loss of income (including both taxes and welfare withdrawal) to the Treasury will fall on some low earners at 79.1 per cent, and that’s even after the Universal Credit has been introduced. Until then, the rate is an incredible 96 per cent. The Director of the CPS, Tim Knox, said:

This factsheet shows up some of the inadequacies and inconsistencies of the UK’s personal taxation system. But the most important aspect it highlights is the need for transparency. We should stop talking about a 20, 40 or 50 per cent tax band and accept that the real marginal rates are much higher.

It’s time for the tax system to be radically overhauled to make it simple, transparent and honest. Britain’s tax system now is none of those things: impossibly complicated, disgracefully opaque and public debate that borders on downright dishonest. It needs fundamental change.

The TaxPayers’ Alliance and Institute of Directors major joint project, the 2020 Tax Commission has been undertaking just this task since January and will publish a comprehensive review in Spring next year. In the meantime, we should at the very least insist politicians and media commentators acknowledge that tax at the basic rate is over 40 per cent, not 20.

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  • Hugh

    PAYE + NI + VAT + Fuel Duty + Council Tax = Not much left for you.

  • Blarg1987

    I think if we all had to take out private medical insurence and other things that national insurence provides, the percentage we would have to pay would be very close if not more. So be interesting to have comparisons with other countries as to what percentage of their salaries goes into these things for comparisons

    • Anonymous

      Well, for  start – if only. If I could put ten percent of my income into my pension instead of into th state’s pocket I’d have a much higher return and, more importantly, it would be *my choice* to do so or not.

      Similarly with private healthcare. Why not?

      Taxes in Britain are too high because the state is too big. It employs too many people who pass the buck from department to department, sloping shoulders and wearing teflon so nothing is ever done, just circled around in an endless whirlpool of waste.

      That must end with an obliteration of the state.

      • Blarg1987

        That still doesn’t ansewer the underlying question of how much it would cost otherwise, and if like you said people would have the choice would that also include the choice of the health providers to insure you or not which would mean if you knew you had a serious diseae and want to get insurence they would havew the right of refusal. Greed works both ways.

      • Steve Collins

        No it shouldn’t. If the state was obliterated and we were left to a monopolistic private sector leviathan, we’d be even more screwed than we are now.

  • http://www.facebook.com/profile.php?id=563490205 Felix Hemsted

    Here’s an idea, why doesn’t the TPA, the IoD, and other like-minded think-tanks such as the adam smith institute and the institute for economic affairs join together in a big political party?
    It would certainly send a message to the buffons in whitehall at the moment

  • http://twitter.com/ukgoldbug Gold Bug

    That doesn’t include all the stealth taxes, fuel taxes, VAT, and the amount loaded on to goods and services because of business taxation. The real basic rate is over 80% 

  • B Cody999

    The Centre for policy studies, as usual a useless organisation putting out the blindingly obvious. How and why do these organisations exist?. Bonfire of the quangos? how about abolition of this pathetic centre.

  • Charleshenrywilliams

    The real tax rate is much closer to 50%; e.g. see …

    http://tinyurl.com/3fuxkcd

  • Steve Collins

    Hang on, what is this nonsense? I’ve just done a quick calculation based on my last salary and I’ve taken home 69% of my gross pay, therefore my marginal rate is 31%. Not 40.2p or 66.6p or whatever figure the Centre for Policy Studies or the TPA have plucked out of the air in order to rabble-rouse….

    • http://twitter.com/rorymeakin Rory Meakin

      Hello,
      It seems you’re confusing “marginal” tax with “average” tax rates. The rates, far from being plucked out of the air, were plucked out of the budget. You also might not have included employers National Insurance contributions.
      For example, the basic rate taxpayer pays income tax at 20% plus employee’s National Insurance at 12%. This adds up to 32%. On top of this there is employer’s Natonal Insurance at 13.8%. This bring the total to 45.8% but this has to be divided by 113.8% to arrive at actual marginal percentage figure paid, 40.2% in the case of a basic rate taxpayer.
      The figures are all on the CPS’s factsheet and can also be verified on HMRC and Treasury publications.
      Best,
      Rory.