New analysis which shows that the United Kingdom has the fourth highest top rate of income tax in the European Union will add to calls for the 50pc band to be scrapped – but I beg to disagree.
Global analysis by accountants KPMG found that out of 96 countries surveyed, only five had tax rates equal to or above the UK’s top rate, which takes effect when annual income exceeds £150,000.
Within the EU, we share our fourth highest tax rate with Belgium and Austria. Only Sweden, Denmark and the Netherlands impose higher rates. Our top rate compares with the EU average of 37 pc and the Western European average of 45 pc.
Marc Burrows of KPMG, commented: “With doubts around what the 50pc top rate of tax is actually yielding, is the highest top rate of personal tax really a table that we want the UK to top?”
No, of course not, but while public finances are desperately stretched, even enthusiasts for less government and lower taxes – such as your humble correspondent – may feel there are more pressing candidates for fiscal reform.
Relatively few people are paid more than £150,000 a year but hundreds of thousands of the poorest people in Britain suffer marginal rates of tax higher than 50pc because of unintentional poverty traps. A toxic combination of income tax, National Insurance Contributions (NICs) and means-tested tax credit withdrawals hits hard-working members of the squeezed middle and means other people living on less than national average earnings have a top marginal tax rate of 73pc.
Hard to believe? Here’s how it works. People earning just over £6,420 – or less than a quarter of national average earnings, according to the Office for National Statistics – pay income tax at 20pc, plus NICs at 12pc and suffer tax credit clawbacks at 41pc; a total marginal tax rate of 73pc. That means they will be allowed to keep just 27p in every extra £1 they earn.
Mike Warburton of accountants Grant Thornton pointed out: “This means that someone earning as little as £144 a week keeps only 27 pence from every £1 that they earn above minimal limits. I am not sure how this reconciles with politicians’ promises to make work pay. It is hardly an incentive to get up early and make an extra effort.”
Nor are unexpected and unwelcome tax spikes confined to people on very low earnings; marginal rates higher than 50pc also hit families earning just over £40,000.
Richard Mannion a director of accountants Smith & Williamson, said: “Under the tax credit system, families are entitled to a family entitlement of £545, but that is taken away at the rate of 41p for every £1 of income over £40,000. So that means that the entitlement is reduced to nil once income exceeds £41,330 and creates a 73pc tax spike between £40,000 and £41,330.
“The interplay between personal tax, NICs and means-tested benefits is horrendously complicated, but what is clear is that low earning families face the highest marginal rate of tax. This doesn’t sound fair to me; it certainly doesn’t sound like a system to encourage independence and make work pay.
“It is wholly unjust that families struggling to live on low incomes pay higher rates of marginal tax than those earning more. Charging less well off taxpayers at rates of 73pc just brings the system into disrepute.”
So, while I am all in favour of less tax, the Chancellor should set to work much lower down the income scale than £150,000 a year. That will win him far more friends – and votes – than worrying about the 50pc band, which can wait till later.
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