60% Tax Trap and Childcare Tax Traps

MetaPhysical

I wrote to my MP who in turn forwarded it to The Treasury and was answered by Nigel Huddlestone, financial secretary of the treasury.

I asked them to explain the utterly bonkers and perverse withdrawal of the personal allowance between 100-125k that results in an effective tax rate of 60% and how this causes perverse incentives to people from doing extra work.  I am a civil engineer and have cut back my hours to not breach the 100k. There is something horrific about paying 62% tax on everything you earn over 100k to 125k.  I read somewhere that this was one of the highest tax rates in Europe.  Had the 100k threshold kept place with inflation it would now be almost 165k.  Of course, 100k is a large salary.  But it is not a king's ransom in 2023.

I also asked similarly regarding the unfair and equally bonkers childcare tax trap as well that the Tories themselves brought it and have not uprated in ten years now.  50k is a ludicrously low level for this to kick in.

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

I do use my pension to offset this to some extent but that is not the point.

eskbanker

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

[Deleted User]

eskbanker said:

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

Unlikely - but the cliff edge is just too severe. I honestly think that a flat rate of 45% on earnings above £100000 would increase the tax take! 

DullGreyGuy

Plenty of countries have higher tax rates than the UK... Belgium is on average 57% tax for earnings over €46,440 when you add the national and local income taxes, in some regions it's higher. In fact there are a lot of Western European countries with tax rates over 50% for higher earners when you add in the different components and for many higher earners is a lot lower than £100,000. 

You really have to look at the overall tax burden rather than the spot rate of certain amount of monies earned. Lets say you earned £110,000, assuming no other benefits etc that puts you on a take-home of £71,603 in the UK whereas Belgium it would be £52,527, Italy it would be £62,828, Sweden £58,592, Denmark £66,101, Portugal £59,329, Spain £67,899

So enjoy your lower working hours and the personal time rather than the 38% income 

Strummer22

[Deleted User] said:

eskbanker said:

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

Unlikely - but the cliff edge is just too severe. I honestly think that a flat rate of 45% on earnings above £100000 would increase the tax take! 

The tax system is in need of a complete overhaul, but no chancellor seems confident enough to do it - not even Kwarteng, as when all is said and done the mini-budget was still just tinkering with the existing system.

Like you I am reducing my hours and putting chunky sums into my pension. For me it's to avoid the HICBC - although I term it the SHTAICBC (slightly higher than average income child benefit charge). If the Gov want people to work more hours, earn more money and grow the economy, it should be self-evident that 60%+ marginal tax rates are not going to help. And whilst human behaviour is unpredictable, it does seem likely that tax intake would at the very least not fall if these bands of stupidly high marginal tax rate were removed.

But politicians doing something sensible? We should be so lucky. 

MetaPhysical

eskbanker said:

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

I'm not.  A plague on all their houses and I will abstain my vote.  However, the point is that the political class seem to have lost sense of reality.  Someone knowingly signed off on this bonkers marginal rate tax system.

MetaPhysical

DullGreyGuy said:

Plenty of countries have higher tax rates than the UK... Belgium is on average 57% tax for earnings over €46,440 when you add the national and local income taxes, in some regions it's higher. In fact there are a lot of Western European countries with tax rates over 50% for higher earners when you add in the different components and for many higher earners is a lot lower than £100,000. 

You really have to look at the overall tax burden rather than the spot rate of certain amount of monies earned. Lets say you earned £110,000, assuming no other benefits etc that puts you on a take-home of £71,603 in the UK whereas Belgium it would be £52,527, Italy it would be £62,828, Sweden £58,592, Denmark £66,101, Portugal £59,329, Spain £67,899

So enjoy your lower working hours and the personal time rather than the 38% income 

Indeed and point taken.  However, those countries you cite have very much better public services to show for that tax, especially Denmark and Sweden - I know, I am engaged to a Dane.  However, that is venturing into politics and not the point of this discussion.

Albermarle

 For me it's to avoid the HICBC - although I term it the SHTAICBC (slightly higher than average income child benefit charge). 

It kicks in between £50K and £60K , which would make it around 65% higher than the average wage,

MetaPhysical

[Deleted User] said:

eskbanker said:

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

Unlikely - but the cliff edge is just too severe. I honestly think that a flat rate of 45% on earnings above £100000 would increase the tax take! 

Agreed.  Even if they insist on these tapers - and in my view they shouldn't - the tapers should be across 50k or even 100k of income to lessen the harsh brutality of them, not across 10k or 25k.  These tapers are perverse even for those much higher up the income scale.
As you say, a 45% rate at a lower level is more fair.

[Deleted User]

MetaPhysical said:

[Deleted User] said:

eskbanker said:

MetaPhysical said:

The reply was basically a shrug of the shoulders and that it would cost too much to change/abolish it and that "the public finances need to be put onto a sustainable footing".  I replied in turn that they should no longer expect my vote at the next GE.

Are you under the impression that Labour would be more sympathetic to high earners?

Unlikely - but the cliff edge is just too severe. I honestly think that a flat rate of 45% on earnings above £100000 would increase the tax take! 

Agreed.  Even if they insist on these tapers - and in my view they shouldn't - the tapers should be across 50k or even 100k of income to lessen the harsh brutality of them, not across 10k or 25k.  These tapers are perverse even for those much higher up the income scale.
As you say, a 45% rate at a lower level is more fair.

Yes - but that wasn’t the point I was making - fair or not! Reducing the the rate to 45% flat above £100000 and retaining the personal allowance would reduce tax paid by someone earning more than £125140 by £3771. 

However there would be much less incentive to take measures to avoid moving from 40% tax to effective 60% rate than from 40% to 45%. 

Veteransaver

You also need to add in the tax trap of student loan repayments.
Then there's the loss of free childcare etc just 1p above the threshold which creates an effective marginal tax rate of over 100%. Eg earn 1p more and lose thousands of pounds worth of free childcare.