thirdcrank wrote:Combine your marginal rate of income tax with your NI contributions to calculate your true tax rate. Ever since the dead sheep, it's been higher than many people believe
Correct method is:
* Take sum of pay + employer's NI
* Divide by net pay
Employer's NI is 13.8%, income tax is 20% and employees NI is 12%. This is thus not 20%, not 32%,
1 - (.68 / 1.138) = 40.2%
Higher rate tax is then 51.0%, as employee NI goes down to 2%, while employer NI is not capped
Universal Credit and Tax Credits before create interesting situations; you get 63% of net taken away, where employer pays now 3% pension, employee 5%, both of which do not affect NI, but the 5% employee pension is exempt from NI.
So from a headline NMW of £8.72 the real wage with pension + NI is £10.03, of which the take home is £2.06, with a further 70p in pension, which is equivalent to 72.5% 'tax' (some not tax in that this is clawback of benefits paid, and benefits may still greatly exceed total tax paid) when you take into account the pension contributions, and a take-home of only 20.6% of the total salary cost.
So the government has a bit of a conflict between people not wanting to work for an extra £2/hour, and trying to cut the welfare bill.
They have been successfully working on this by increasing NMW above inflation, the effect of which is to increase pay so that fewer people are left with marginal rates where extra hours/responsibility are not worthwhile (once you earn enough to wipe out your base benefits entitlement, the marginal rate becomes much less forbidding)
Essentially at the lowest level there are lots of people who receive more from the government than they do from their employer,and the Blair approach was to pay them a big bonus on their benefits to do 16 hours a week, so that people were tempted into the labour market. This could be seen as corporate welfare in that you had people only working because of tax credits - the pay offered by the employer was not attractive enough for that on its own.
The idea since then has been how to maximise the amount of work people do by various carrot or stick approaches, i.e. either add extra incentives,or try to get people to ignore the fact that extra hours aren't cost more effective