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

August 19, 2011 9:00 AM

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and £114,950 face a rate of 66.6 per cent because in this range £1 of the personal allowance of tax free income is withdrawn for every £2 earned at the same time as having to pay Income Tax and both National Insurance rates.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.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.

Latest Blogs: