When is a tax cut not a tax cut?
by Liam
As reported here, the basic rate of income tax was cut by 2% (from 22% to 20%) last Sunday. The starting rate for income tax also disappeared last Sunday so no pay is taxed at 10% any more. This will cost most employees £223.00 per year as £2,230 of their pay will be taxed at 20% instead of 10%.
As well as tweaking income tax, national insurance had a bit of “fine tunning” too. This took the form of the upper earnings limit increasing by £100.00. This means that employees pay national insurance at 11% on £100 more of their income per week than they did this time last week. That means an employee earning £40,400.00 per year (or more) will pay £10.00 more national insurance per week (yes, £10.00 more not £11.00 because employees still pay 1% national insurance above the upper earnings limit). That’s £520.00 more per year!
So, an employee on £40,400.00 per year has saved £654.70 in income tax (2% of £40,400.00 less starting rate allowance of £2,230.00 less personal allowance of £5,435) but pays £223.00 more in income tax because of the abolition of the starting rate and pays £520.00 more national insurance. So, an employee on a salary of £40,400.00 is now £88.30 worse off following the “tax cut”! This ignores fiscal drag on the personal allowance too!
Employer’s national insurance has not changed significantly as the upper earnings limit is irrelevant to employer’s national insurance (which remains at 12.8%) - employers pay national insurance on all earnings above £105.00 per week and do not benefit from a reduced rate on higher tiers of pay.
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