The effective tax rates you won’t see listed in the party manifestos or your P60

07 June 2017

The general election is fast approaching and income tax has been a source of debate by all the parties. It is a peculiar coincidence that the election coincides with the time when all employees receive their P60 outlining their earnings and the tax paid for the 2016/17 tax year. In many cases this is where a large number of individuals realise just how much tax and NIC they actually pay. However, for approximately 800,000 tax payers, their effective rates of tax are hidden within those figures.

For those individuals who earn in excess of £100,000 per annum there is a decrease in their personal allowance by £1 for every £2 over the £100,000. The complexities of the current tax system mean that the individuals actually paid tax at an effective rate of 60 percent in 2016/17. It is understood that the number of people paying this rate is increasing significantly and is projected to increase to over 1m taxpayers by 2019.

But this hidden rate is likely to increase by over 10 per cent should there be a Labour government. The Labour party has stated in their manifesto that they will lower the 45 per cent tax band to earnings in excess of £80,000 from the current £150,000. In this respect employees who earn between £100,000 and £123,000 will effectively pay tax at 67.5 per cent on those earnings.

If we were to take the total tax burden of both the employee and employer who is required to pay NIC on providing this salary the combined rate becomes 73.2 per cent, one of the highest rates of tax we have in this country.

We all believe in a fair tax system and perhaps it is time for the new government to amend this confusing rule and come up with a solution which is fair, equitable and easy to understand.

For more information please get in touch with Graham Farquhar, or your usual RSM contact.