This is the sixth blog in a new rolling programme of recommendations for tax simplicity from CPS Tax Expert and Research Fellow David Martin. The 'Tax Simplifier' series aims to make the case for a much simpler tax code with practical recommendations for policy change on a regular basis. Blogs will be published twice per week, on Monday and Thursday. Read David's previous blog on the CGT. You can follow David on Twitter @TaxSimplifier.
The complexity of our tax rates on income is awful.
For 2013-14 the basic rate of 20% applies to taxable income of between £0-£32,010, the higher rate of 40% applies to taxable income of between £32,011- £150,000 and the additional rate of 45% applies to taxable income over £150,000.
The personal allowance begins to be withdrawn where income exceeds £100,000, until it is eliminated where income exceeds £118,880.
There is also a starting rate for people on low incomes of 10% for savings income between £0- £2,790. There are special rates for dividends - the 10 per cent ordinary rate, the 32.5 per cent dividend upper rate and the dividend additional rate of 37.5 per cent.
NIC rates for employees are 12% for income between £149-£797 p.w. (£7,748 - £41,444 p.a.) and 2% for income over £797p.w.
The new rules for withdrawing child benefit will create more effective tax rates. People earning between £50,000 and £60,000 face a loss equivalent to an income tax rate of 10.5% for their first child and 7% for each subsequent child.
The repayment of student loans, which can add a further 9% to the tax rate is a further complication.
Let’s take a simple example of a married man with two children, who has no savings or dividend income, and no student loans. Putting together the above information his marginal rates will be:-
Total Income - £ Marginal rate
0- 7,748 0%
7,748 -9,440 12%
9,440 - 41,450 32%
41,450 -50,000 42%
50,000 - 60,000 59.5%
60,000 - 100,000 42%
100,000 - 118,880 62%
118,880 - 150,000 42%
Over 150,000 47%
This is over the top. For example, people need to be able to work out the financial implications of making additional pension contributions, or salary sacrifice, or taking on more paid work - do we really expect them to cope with this complexity?