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.

I’m in Scotland where the tax band for those on between £43,663 and £75,000 pay 42%. Thereafter it’s 45%.

I crept into the 42% band for, I think, the first time this year. Needless to say, I have now opened a private pension (self-employed) to reduce chances of that happening again.

It is correct that fiscal drag has reduced the value of the salary where people start to pay higher rate tax, but if they'd put the allowances up, they'd have needed to raise taxes elsewhere or cut services, which isn't necessarily what people would want.

For me the problem is the lack of transparency about the process. We've had and are continuing to have real terms tax rises without people being fully informed about this happening.

For me the problem is the lack of transparency about the process. We've had and are continuing to have real terms tax rises without people being fully informed about this happening.

agree particularly when you account for years of wage stagnation

No, we'd be hundreds worse off in Scotland (DH a high earner)

but if they'd put the allowances up, they'd have needed to raise taxes elsewhere or cut services, which isn't necessarily what people would want.

they could target wealth as opposed to income

Fiscal drag and cliff edges like the 100k mean that people change behaviour. I'm in Scotland - the higher bands mean that I maximise my pension contributions - so overall the tax take is probably less for my personal circumstances - whereas if they hadn't played with the tax bands I might have carried on as before.

Higher and additional rate (yes, there is a 40% tax bracket) do feel disproportionately penalised! They are taxed high, lose their tax free allowance, no tax free childcare, no nursery funded hours. But no one can say this on Mumsnet as it ends up as a massive pile on for daring to earn six figures (even though we need people earning and contributing to pay for the things they are not entitled to).

As for what makes them do it. Well - 50% of something is better than 100% of nothing. Job satisfaction. Career development. Contributing to society.

child benefit should be for everyone, birth rates are low as it is. Higher earners should have incentivises too.

Which they have, to the horror of the people who thought they'd beaten the system by shoving all their excess money in their pension.

I am aware of the irony of saying that, but I've only benefited by a few hundred pounds not tens of thousands, or more.

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.

Well you do still keep most of it. I can see it might affect things like taking extra shifts but I wouldn't ever turn down a pay rise on a salary! I had a child in nursery (although only 2 days a week) at the point my salary ticked over 100k so I just made sure pension kept it below that until I wasn't using nursery anymore. I now earn just over twice that so I am glad I didn't stall my career at 99k just to avoid a higher % of tax on the increase.

Because the Gov wants more people in the 40% bracket, that's why they haven't increased it

OP your figures are wrong. Others have given you the correct ones

But then you can take out up to 25% tax free at age 55 (or 57 from 2028 - thanks Rachel Reeves!) - if your employer does pension contribution matching then its a no brainer :-)

this is a helpful easy to understand website
How Income Tax and the Personal Allowance works | MoneyHelper

Oh for goodness sake. You're only taxed at 40% on every pound above the threshold. So no, it's not unfair. You're still paying a lower average rate than people earning at the higher end of the band, because a bigger portion of their overall pay is taxed at the 40% rate.
I've been at the lower end of the 40% bracket almost all my working life, I recognise that earning that much is actually a privilege, compared with what most people earn, and I'm proud to be playing my part funding public services.

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.

Well.... as someone in that bracket I do often wonder wtf I'm bothering for! My situation is made worse because I have 2 young kids. Over £100K means I:

• Lose personal allowance, so they claw it back through addition tax between £100K-£125 so its about 60% tax deduction;
• Get no child benefit (I don't mind this tbh)
• Lose ability to claim tax-free childcare
• Lost my funded childcare hours, which are worth a really good amount of £ per year.

Over £125K you enter into Additional Rate band too, which means 45% tax. Also, you lose any savings allowance too, so you're taxed 45% on any interest you make in any savings accounts too... just for good measure!

I have been trying to put money into my pension to mitigate some of the above, but its not always that simple. We're at a stage in life where things are probably the most expensive it'll ever be - big mortgage, high childcare costs etc. - so we kind of need some of that cash now, rather than lock it away until we're 60. As a result we just have to take the tax hit on a lot of it.

And don't get me started on the fact that loss of funded childcare hours is based on only one parent going over £100k, whereas two parents could earn £99,999 and get all the hours! If there has to be a limit then it should be (a) tapered like child benefit; and (b) calculated on household income rather than one parents' income.

You’re still wrong

I am a primary teacher and was at a course yesterday with high school teachers who were saying now that our salary has increased any extra exam marking they do is taxed at 50% resulting, understandably, in a huge shortage of people willing to do it. There must be lots of similar examples putting people off doing extra work.

Seems like they need to increase the £50k threshold as that's not a high warning salary any longer.

Well that explains why you don't know that the 40% rate only kicks in on earnings above £37,700 when you earn over £125k (because those people have lost their tax-free allowance). For those earning under £100k the 40% band starts at just over £50k, and thete is tapered loss if the tax-free allowance between £100k and £125k. That's all before pension contributions, which will reduce everyone's income tax.

I don't know why HMRC quote the 40% tax band as starting at £37,700 without making it clearer that that means £37k PLUS whatever your tax-free allowance is!

I don’t mean to be rude, but I don’t think you understand tax.
someone earning £125,000 will Pay a huge amount of tax.

You progressively lose the personal allowance over £100k, so £100k+ earners are paying more than £99k earners.

There aren’t enough people earning £100k+, OP. That’s why the bracket is that big.

Rest assured, people on £100k+ pay an awful lot of tax. I’m on £65k and my take home is about £45k a year. My DH is on £120k and take home is about £70k.

The cut off for tax-free childcare etc is not really £100k since it’s net-adjusted income of £100k. You can be earning an awful lot more and still get it, even with bog-standard pension contributions. And in many pension situations (such as NHS) you can take off an extra 25% per £1 of pension contribution too.

@Didimum it means if you want <£160k the only sensible thing to do is max out your pension contributions though.

Which… given the size of most people’s mortgages, isn’t the most sensible use of the money IMO.

Most expensive years of your life with countless competing financial objectives (90%+ mortgage probably being the big one), and you are… putting 40% of your income into a pension you can’t access for 20 years minimum.

They won’t be paying 50% tax, not least because there isn’t a 50% tax rate.

They may be paying 42% (40% plus 2% NI).

@LittleBearPad plus 9% student loan = 51%