Colin's Journal

Colin's Journal: A place for thoughts about politics, software, and daily life.

December 7th, 2004

True income tax rates in the UK

Grey view of the lagoon from Venice.I’ve recently had reason to investigate the structure of income tax and national insurance in the UK. It’s always easy to take the headline income tax rate (22% basic and 40% higher) and think of that as the amount of money being handed to the government. Unfortunately the true tax situation is neither that simple, nor that low.

Take for example, a company that can afford to spend £1000 on a Christmas bonus for a basic rate employee. Using the headline income tax rate you would expect the employee to receive an £880 bonus, yet in practise they will actually receive £593.97. This is an effective tax rate of 40.6% and that doesn’t take into account VAT, which reduces spending power further to £490 (or a 51% tax rate).

Here’s how the numbers add up:

Employer budget: £1000
Amount paid to employee (this plus the NIC add up to the budget): £886.52
Employer NIC (National Insurance Contribution Class 1 "secondary" at 12.8%): £113.48

Employee tax (at 22%): £195.04
Employee NIC (Class 1 "primary" at 11% for those earning less than £31,720): £97.52

Total money in the pay packet: £593.97

Higher tax rate payers are, of course hit harder, but not by as much as you might expect. Earnings of over £31,400 attract the 40% income tax rate, but employee national insurance contributions fall to %1 after £31,720. The resulting pay received for a £1000 company expenditure is £523.05 or an effective tax rate of 47.7%.

Note: All figures are for the 2004/2005 tax year. National insurance information was taken from the Business Link’s National Insurance contribution rates and allowances site, with the latest income tax thresholds from the Inland Revenue.

I really need to make time for some more photography. It’s been an age since I got out and about with my camera, so long ago in fact that I’m now resorting to digging out old Venice photos!

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