Know how much tax you REALLY pay? It could be as high as 77%

IT’S a simple enough question: ‘How much tax do you pay?’ In most cases, the answer is: ‘Too much.’ After all, nobody likes paying tax. Some even argue there is a moral duty to pay as little as possible – as long as it’s (legal) avoidance rather than (illegal) evasion. But ask the question in a slightly different way: ‘How much tax do you actually pay?’ The response is different – and usually wrong. Most people think they pay the headline rate. In other words, if you earn above £12,570 a year you pay the basic income tax rate of 20 per cent. Adding on 12 per cent for National Insurance takes it to 32 per cent.

Earn more than £50,271 and the 40 per cent higher income tax rate applies. And if you’re on at least £125,000, the top rate of 45 per cent kicks in – this rate used to start at £150,000 until Chancellor Jeremy Hunt lowered the threshold in his recent household-bruising Budget. He left Britain nursing its highest tax burden since the Second World War.

His biggest revenue-raising wheeze by far was to freeze all income thresholds and allowances until These ‘stealth’ taxes mean millions more face higher tax bills as pay rises pull them into higher tax bands. Economists call the phenomenon ‘fiscal drag’. But such jargon covers up a multitude of sins.

The long and short of it is that the effective amount of tax that individuals pay is far higher than the headline rate.

That’s because of often eye-wateringly high rates of marginal taxation – the percentage of tax paid on every extra pound earned above certain income levels.

All workers incur these additional rates when their pay rises and they are dragged into higher tax bands.

The real kicker, though, is when allowances such as child benefit are withdrawn. That can take the marginal rate to 68p for a family of three children – see box. It means that for every extra pound earned between £50,521 and £60,000, just 32p goes in take-home pay. The rest is tax.

But it gets worse, especially for students in England who have to pay an additional ‘graduate tax’ on loans taken out to fund tuition fees and living costs. Graduates pay interest of 9 per cent on these loans if they earn above £27,295 a year – and an extra 6 per cent on earnings above £21,000 if they have a postgraduate degree. The money is collected through their employer’s payroll – and is on top of income tax and National Insurance contributions. It means the amount of basic rate tax that such a graduate pays is not 20 per cent, or 32 per cent – the rate with National Insurance added – but 41 per cent.

For high-earning post-graduates it’s even worse. Accountants at Blick Rothenberg calculate that those with outstanding loans for both degrees will keep just 23p of every extra £1 they earn between £100,000 and £125,140 as their personal allowances are gradually withdrawn. That means they pay a whopping 77p in tax on every extra pound earned.

In a nutshell, marginal tax rates are ludicrously high – and they are hurting not just the pockets of hard-working individuals and families, but the wider economy as well. Dan Neidle, founder of Tax Policy Associates, says: ‘There’s a common view we shouldn’t feel sorry for people earning above £50,000.

That view is deeply dumb. It’s not about feeling sorry – it’s about asking if stupidly high marginal tax rates are holding back growth.’

Experts agree that the impact on the wider economy should not be underestimated. This is not a victimless crime. Robert Salter, a director of Blick Rothenberg, says: ‘There is a big fear that people who find themselves unwittingly subject to these punitive rates of tax become disillusioned with the political and eco2028. nomic system and feel there is no benefit from doing additional work or learning new skills.’

The administrative cost of all this complexity is also considerable.

Salter says: ‘These punitive tax rates are often inefficient and time consuming for the Inland Revenue to collect.’

Then there is the politics. ‘The fact that the Government pretends that the top rate of tax is 45 per cent is deliberately misleading,’ adds Salter. ‘If the Government genuinely believes that higher tax rates act as a disincentive for people to work, it is simply inequitable that people who are not the highest earners pay the highest rates of tax.’