The Daily Telegraph - Saturday - Money

The chart that shows why you pay 60pc or 100pc tax

- Charlotte Gifford

Basic-rate taxpayers face losing more than two thirds of their incomes to hidden taxes – and the rates are only going to get worse as bands stay frozen until 2027-28.

There are three rates of income tax in Britain: basic at 20pc; higher at 40pc of earnings over £50,270 and additional at 45pc, which kicks in above £125,140. This was lowered from £ 150,000 in Chancellor Jeremy Hunt’s Autumn Statement.

But even at the lower end of the pay scale, some earners attract a rate of tax that is far higher than 45p in the pound.

When earnings rise above one of several thresholds, taxpayers forfeit 60pc, 70pc, or even more than 100pc on a proportion of their income, as the chart below shows.

These huge marginal rates of tax are caused by special tax benefits and allowances that have been introduced under various government­s and then withdrawn or capped under others.

Child benefit, for example, is entirely “taxed away” if you earn over £60,000 and starts to be withdrawn from £50,000, following the introducti­on of a tax charge for higher earners in 2013. Between those two levels of income, parents suffer a charge equal to 100pc of their entitlemen­t.

A family with three children faces paying tax at an effective rate of around 69pc on earnings between £ 50,000 and £60,000 because of the effect of the tax charge.

Isaac Delestre, of the Institute for Fiscal Studies think tank, said these spikes in marginal income tax rates, are “very unwelcome” features of the tax system – “causing significan­t distortion­s to the earnings and savings behaviour of individual­s in ways that make our economy less efficient.”

He added: “Regrettabl­y, these spikes have not only been allowed to persist but, because thresholds are frozen in cash terms, each year impact an evergreate­r share of the population.”

This is because the £50,000 cap has not risen with inflation and has remained frozen, whereas higher rate tax now starts to be levied on earnings above £50,270. In another example of hidden marginal tax rates, those earning £100,000 a year face paying tax, not at 40pc as you would expect, but at 60pc on a band of their earnings, as this is the point at which the Government begins to withdraw the £12,570 tax-free personal allowance.

For every £1 earned over £100,000, the state reduces the allowance by 50p. The result is that each additional £1 of income effectivel­y incurs 60p of income tax, as the chart shows. Once National Insurance is factored in, the true rate is even higher.

Earnings of more than £125,140 are then taxed at the additional rate 45pc, and the distorting effect of the personal allowance clawback is lost.

The vertical line which goes off of the chart illustrate­s the point at which the marriage allowance, worth £252 per couple (as long as one of you earns less than the £12,570-a-year personal allowance and the other pays 20pc), is lost, as the earner’s income enters the higher 40pc bracket. In effect, £1 extra earned costs the earner £252.

Graduates also face losing more of their income to tax, if you count student loan repayments as de facto levies. They represent an effective 9pc in additional income tax.

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