Tax rates of more than 100%, higher tax rates at £110,000 than £150,000, frozen allowances for pensioners, and when
does higher rate tax start? All figures are at 2014/15 rates.
When does higher rate tax start?
People ask me “When does higher rate tax start?” Often preceded by "I’m
confused” and attaching an official document which says, unhelpfully, that basic rate tax ends at £31,865.
The confusion is caused by the Treasury which likes to refer to the ‘basic
rate band’ as running from £0 to ££31,865 in 2014/15 but without mentioning
that amount is on top of the personal tax allowance. So higher rate tax in 2014/15
begins on income above £41,865 made up of the £10,000 tax-free personal
allowance plus the £31,865 basic rate limit. The table shows the personal
allowance and the higher rate threshold for the last few years
2010/11
|
2011/12
|
2012/13
|
2013/14
|
2014/15
|
2015/16
|
|
Personal allowance
|
£6,475
|
£7,475
|
£8,105
|
£9,440
|
£10,000
|
£10,500
|
Basic rate limit
|
£37,400
|
£35,000
|
£34,370
|
£32,010
|
£31,865
|
£31,785
|
Higher rate starts
|
£43,875
|
£42,475
|
£42,475
|
£41,450
|
£41,865
|
£42,285
|
After falling for three years the threshold for higher rate tax is now
rising by 1% a year. The result has been that the number of taxpayers paying
higher rate tax has risen by has increased by around two million under the Coalition Government. Just
over five million will pay it in 2015/16 compared with just over three million
in 2010/11 (source: IFS).
What is the marginal tax rate on
Child Benefit?
The new Child Benefit High Income Charge is a tax on child benefit where
either partner has an income above £50,099. The tax on the child benefit is 1%
for each £100 above £50,000 thus reaching 100% of the child benefit as income
reaches £60,000.
Child benefit is £20.30 a week (£1055.60 per year) for the first child
and £13.40 per week (£696.80 a year) for each other child. So for each £100
rise in income the tax charge is 1% of £1055.60 for those with one child; 1% of
£1752.40 for two children, 1% of £2449.20 for three children and so on.
People earning between £50,000 and £60,000 pay income tax at 40% and
National Insurance of 2%. If they have a student loan they pay another 9%
towards that. So their marginal rate of tax is already 42% or 51% with a
student loan. If the tax taken from the child benefit is also added the
marginal rate for someone with, for example, three children for each £100
earned is
| Income tax | £40.00 |
| NI | £2.00 |
| CBHIC | £24.49 |
| Total | £66.49 |
So for those with three children the marginal rate of tax on each extra £100 is 66.5%. Add on £9
student loan repayment and the marginal rate rises to 75.5%.
Marginal tax rate on each £100
for incomes £50,000 to £60,000 where child benefit received
Normal
|
With student loan
|
||
Children
|
|||
1
|
52.6%
|
61.6%
|
|
2
|
59.5%
|
58.5%
|
|
3
|
66.5%
|
75.5%
|
|
4
|
73.5%
|
82.5%
|
|
5
|
80.4%
|
89.4%
|
|
6
|
87.4%
|
96.4%
|
|
7
|
94.4%
|
103.4%
|
|
8
|
101.3%
|
110.3%
|
|
9
|
108.3%
|
117.3%
|
|
10
|
115.3%
|
124.3%
|
|
As the table shows everyone in this position pays above the notional
top rate of tax of 45% and will pay more than 100% on each extra £100 if they
have eight children, or with seven children if they are repaying a student
loan. So earn £100 and pay for example, £110.30 in tax.
Why do I pay 60% tax over
£100,000?
The top rate of tax is 45% on incomes above £150,000. But people with
income between £100,000 and £120,000 actually pay a marginal rate of income tax
of 60% on each extra £2 they earn.
Since 2010/11 the personal allowance has been phased out once income exceeds £100,000. It
disappears at the rate of £1 off the personal allowance for each £2 of income
above £100,000. So an extra £2 of income is taxed at 40% and also brings down
the personal allowance by £1. That brings another £1 of income into tax charged at
40%. So a £2 rise in income results in £3 being taxed at 40% which is £1.20. So
£2 of income results in extra income tax of £1.20 which is a rate of 60%.
The marginal rate continues until the personal allowance disappears. In 2014/15 that happens as income
hits £120,000. Above that the marginal rate reverts to 40%. And then of course
rises to 45% above £150,000.
Why do pensioners pay 30% tax?
Only some, and a declining number, of people over 65 pay a marginal tax
rate of 30% on a narrow band of income above £27,000 a year. People born before
6 April 1948 – who are now 66, get a higher personal tax allowance than younger
people. The allowance is £10,500 for those born 6 April 1938 to 5 April 1948
and £10,660 for those born before 6 April 1938. These age allowances used to
apply at 65 and 75 but from 2013/14 were frozen at their 2012/13 rates and
retained only for those born before those dates. The higher age allowance is
reduced if income exceeds £27,000 in 2014/15.
The age allowance is reduced at the rate of £1 off for each £2 of extra
income. So an extra £2 of income is taxed at 20% and also brings down the age allowance
by £1. That brings another £1 of income into tax paid at 20%. So a £2 rise in
income results in £3 being taxed at 20% which is 60p. So £2 of income results
in extra income tax of 60p which is a rate of 30%.
Once the age allowance is reduced to the personal allowance is then
stays at that level. So in 2014/15 the marginal rate applies only to income
between £27,000 and £28,000 for the younger age group and between £27,000 and
£28,320 for the older group.
In 2015/16 the personal allowance will equal the lower age allowance so
the problem will disappear for that age group and will almost certainly vanish
for the older group in 2016/17 as the personal allowance rises above £10,660.
Why are tax allowances for
pensioners frozen when they are rising for others?
In the past people got a higher personal allowance in the tax year they
reached 65 and a slightly higher one that that when they reached 75. But in
2013/14 these age allowances were frozen at their 2012/13 rate and only given
to those entitled in 2012/13. The allowance is £10,500 for those born 6 April 1938
to 5 April 1948 and £10,660 for those born before 6 April 1938.
The result is that the tax allowances for those age groups have not
risen in 2013/14, 2014/15 and will not rise in 2015/16. By then the personal
allowance will be £10,500 for everyone so those born 6 April 1938 to 5 April 1948
will get the same as younger people and in 2016/17 should see their allowance
rise above that level. The policy is that it will rise by CPI so probably by 2%
or about £210 taking it to £10,710.
That should also mean that the older group born before 6 April 1938
should see their allowance rise – though only by around £50.
Pensioners with incomes high enough not to get age allowance have of
course seen their personal allowance rise by the same amount as younger people.
Version 1.00
24 March 2014
