Tax brackets

[Vergus]

AIBU or am I justified in thinking that the earnings difference is grossly unfair for people on the lower end of the 40% tax bracket - so those on £37,701 per annum (which is when you start paying 40% tax - up to £125,140 per annum.) Someone who earns on the lower end of this banding is paying exactly the same amount of tax as someone on £125,140. That's nuts! Surely they should stagger it more effectively, so that you don't have people on essentially a modest, average wage paying the same as higher earners? Or introduce the jump from 20% to 40% at a higher level, so around 60k per annum?

I just think the disparity in this strange standardised approach to two very different income levels must leave those who just earn enough to push them over the threshold very badly off indeed.

So I crunched the numbers. A person on £55000 per year pays 17.15% of their entire salary on tax. A person on £125000 pays 29.95% of their entire salary on tax because far more of their salary is taxed at the higher rate. That's before looking at the lower allowance on savings interest and other things.

Someone on £125k will pay approx £42k in income tax and £4.5k in NI. Someone on £50k will pay approx £7.4k in income tax and £2993 in NI. Why do you feel so hard done by OP? It’s the people on £100k plus who are paying the majority of the income tax in this country.

Enjoy your payrise which I assume has taken you into the 40% bracket.

@Spirallingdownwards

You assume wrong. I don't earn even 37k per annum. But thanks for your contribution!

I am fortunate that my earnings have increased over the years into the higher tax bracket 40% but a simple salary sacrifice to your pension can reduce that taxable amount to below that threshold.. similarly when getting close to the 110K+ which for each £1 earned over that anything over that would be taxed at 50%. I see it as a fair system but when you tip over into a higher tax bracket its not always worth the extra pay until your earnings get into the c55k range.

@whatapalarva

but a simple salary sacrifice to your pension can reduce that taxable amount to below that threshold..

This is very good advice.

sorry ill correct that, I meant anything over 100K - each £1 earned is taxed at 50%

A lot of the issue is fiscal drag. It's not kept up with inflation over the last few years, so a salary of 50k now buys what 33k did in 2010, but back then the 40% rate kicked in at 37.4k.

It is quite usual for those type of comments to come up when people first tip over into that bracket. And also quite usual for the same people not to realise what happens at £100k.

@MotionIntheOcean

A lot of the issue is fiscal drag. It's not kept up with inflation over the last few years, so a salary of 50k now buys what 33k did in 2010, but back then the 40% rate kicked in at 37.4k.

This was in my mind too although you have put it a lot more eloquently than I could. 50k doesn't go far nowadays

You’re very badly informed. Maybe get up to date before being outraged.

The tax brackets have been frozen until 2027/2028. The labor government chose to continue the freeze when they came into government.

@Spirallingdownwards

I was trying to work out the tax letter I'd received this morning - it says on there that if your total income is more than your tax-free amount then you will pay tax as follows:

at 20% on the first 37,700
at 40% on income between £37,701 and £125,140
at 45% on anything over £125,40

So I am now assuming, reading the replies on this thread that they mean you are taxed at 20% on the first 37,700 ABOVE your initial tax free personal allowance which for me seems to be £11,334. I think??! Wish they would make it clearer so people with very basic knowledge of the tax system (like me) could work it out. Reading the letter, I instantly assumed that I am taxed 40% on anything above 37,701 which seems very low indeed

As other people have pointed out, you lose your personal allowance between 100-125k so you are taxed a bigger percentage.

Also, you lose child benefit fully by £80k and access to tax free childcare at £100k so there are lots of things a £50k earner can access financially that are not available for higher earners.

@Completelyjo

You’re very badly informed. Maybe get up to date before being outraged.

You sound helpful and friendly. I am not "outraged," just confused. But thanks. A really useful post!

The rate you pay 40% should be much higher

Yes so you only pay the tax on the part of the bracket it applies to.
So higher rate tax only applies to any money you earn over the threshold.
The money you earn up to the threshold is taxed at the lower rate regardless of how mucb you earn over the rate.
Also, if you earn over certain amojnts you lose child benefit, tax free childcare and lose your personal allowance.
The worst place to be from a tax perspective is between 100 and 125k, you end up losing all the above and also paying higher rate tax. Which is extremely annoying. Basically you end up with about 45 percent of any money you earn after 100k.

Op you’re correct now but as you say, it can be a bit hard to understand.

you get 12k (ish) tax free then pay 20% on the next 37k. So that’s earning about 50k before you pop into the 40% band.

but remember because you only pay 40% on anything above 50k, those just in that band pay a tiny bit more.

and as others have said, above 100k it’s actually around 60% as you moose your allowance.

it can be fiddly to understand but I’d say it’s always better to be factually right before deciding something is unfair

A person earning £30k takes home around £25k. Someone earning £60k takes home around £45.3k (so after tax they do not have twice what a person on £30k earns).

A person earning £120k takes home c £71.6k (about 58% more than the person earning 60k, and less than 3x what the 30k earner takes home, despite earning 4 x the gross salary). So higher earners pay much more tax.

I don’t mind paying more tax as I earn more, but I do mind people complaining that the system is in some way unfair to people who earn less!

@Billydavey

you get 12k (ish) tax free then pay 20% on the next 37k. So that’s earning about 50k before you pop into the 40% band.

That makes sense. But - on the point of unfairness if I were a higher earner (which I'm not,) I would feel the system penalises me disproportionately as @Crazybaby123 says:

The worst place to be from a tax perspective is between 100 and 125k, you end up losing all the above and also paying higher rate tax. Which is extremely annoying. Basically you end up with about 45 percent of any money you earn after 100k.

What, therefore, is the incentive for people to be driven to progress their careers into higher pay brackets, given that they reap just over half the financial reward. That seems inordinately skewed from a system perspective.

I am just over the 40% tax banding and it is why I will never ever work overtime (nurse), with NI, tax & pension I don't see 50% of it and so for me it is not worth doing - I am effectively earning the same amount as a much lower banding for a hell of a lot more responsibility.

Yes, this is a multi party fuck up.

The higher tax rates do depend on where you live. Scotland has more income tax bands than England and Wales. The rates are also different. You can see these in the links below
Scotland - https://www.mygov.scot/scottish-income-tax/current-income-tax-rates
England and Wales - https://www.gov.uk/income-tax-rates

The fact you dont understand the basic mathematical tax points people have made above demonstrates the problem this country has in not understanding how little tax most people pay vs those who do.

@Pogpog21

The fact you dont understand the basic mathematical tax points people have made above demonstrates the problem this country has in not understanding how little tax most people pay vs those who do.

How very rude. But I'm sure you know everything and there's not a single area where you have any gap in learning. Sending happy vibes your way