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If one wants to be precise, depending on your circumstances, earning an additional £ when you are making 99’999£ per annum has disastrous consequences. As we s

by mmarq 4y ago

If one wants to be precise, depending on your circumstances, earning an additional £ when you are making 99’999£ per annum has disastrous consequences. As we said your marginal income tax rate goes to 60% until you start making £125K, when it drops to 45%. If you consider NI and student loans, your tax marginal tax rate could approach 70% in that bracket. At 100K you lose some means tested benefits, for instance free childcare, that in London may be worth in excess of £1500 per month. It means that somebody with a child making £100K is poorer than somebody with a child earning £75K (1500*12=18000 after tax, so 30K before tax at a 40% marginal tax rate). In a place where the most miserable 2-bedroom flat cost in excess of 500K and where the average rent is £2400 per month, 100K a year, which is 5.5K a month after tax, doesn’t make you rich by any stretch of the imagination. You spend 70+% of your income on rent and childcare. Let us not get carried away with silly comparisons with millionaires. In Germany your tax expenditure changes depending on you tax class. A married couple with children may end up paying much less taxes than in the UK (I for instance would pay ~£500-800 less a month).

tharkun__ 4y ago
That's great information. Thank you. Why no link to a calculator that does all of this like I've asked for a few times now if the government's own doesn't do it correctly? Like I mentioned, marginal tax rate comparisons are often flawed and not helpful. If you are correct about your marginal tax rate changing to 60%, it still only means 25k have 60% taken. It still sucks of course but your "tax bill" isn't going to be 60%. Let's take your "disastrous" example of making one extra pound on top of 99,999 GBP. Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. So if I make 100k exactly nothing changes at all. But let's call that an "off by one error". Let's say I earn 100,002. If I calculate this correctly - and I might not - then my allowance of 12,570 goes down to 12,569. So 1£ is now no longer tax free and I need to pay taxes on it. My additional 2£ of earnings are also subject to 40% tax. So I only get 1.2£ net from those. So let's assume this does things correctly (unlike the government's own) https://www.uktaxcalculators.co.uk/ https://www.uktaxcalculators.co.uk/ and input the numbers. Ah yes, it seems to do it: Gross Income: £100,000 Allowance: £12,570.00 Net income: £66,322.92 Average tax rate: ~33.6770% Gross Income: £100,002 Allowance: £12,569.00 Net income: £66,323.67 Average tax rate: ~33.6776% Difference in net income for 2£ extra gross: 0.75£ or slightly above 60% effective marginal tax so to speak. Looking at the average tax rate, there's hardly any difference at all. Let's look at the other end: Gross Income: £125,000 Allowance: £70.00 Net income: £75,640.66 Average tax rate: ~39.487% I'd like to compare this to CAD again. Most expensive province of Quebec again. It's about 208,000 CAD. Gross Income: 208,000 Net income: 122,953 Average tax rate: 40.89% Marginal tax rate: 49.96% So about 123k or about 73.8k£. Do keep in mind of course that all of this is without taking into account various family or work situations in either case. Especially in said expensive province of Quebec, child care services are available in various ways like you describe for the UK. E.g. the 9$ per day day-care spots where the price also goes up with your income level, so the same kind of calculation you made for the UK could be made there. The more you earn, the more of your own money you have to use. In a province like Alberta, where your average tax for the above 208k is only around 33% you don't have day-care spots like that and will pay a lot more money for said services. Things like pension payments reduce your income before being input into this calculation. I.e. you could earn 250k CAD but put 42k into an RRSP and you'd end up back at the exact same calculation as above with 208k of taxable income.

by mmarq 4y ago

tharkun__ 4y ago

That's great information. Thank you. Why no link to a calculator that does all of this like I've asked for a few times now if the government's own doesn't do it correctly? Like I mentioned, marginal tax rate comparisons are often flawed and not helpful. If you are correct about your marginal tax rate changing to 60%, it still only means 25k have 60% taken. It still sucks of course but your "tax bill" isn't going to be 60%. Let's take your "disastrous" example of making one extra pound on top of 99,999 GBP. Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. So if I make 100k exactly nothing changes at all. But let's call that an "off by one error". Let's say I earn 100,002. If I calculate this correctly - and I might not - then my allowance of 12,570 goes down to 12,569. So 1£ is now no longer tax free and I need to pay taxes on it. My additional 2£ of earnings are also subject to 40% tax. So I only get 1.2£ net from those. So let's assume this does things correctly (unlike the government's own) https://www.uktaxcalculators.co.uk/ https://www.uktaxcalculators.co.uk/ and input the numbers. Ah yes, it seems to do it: Gross Income: £100,000 Allowance: £12,570.00 Net income: £66,322.92 Average tax rate: ~33.6770% Gross Income: £100,002 Allowance: £12,569.00 Net income: £66,323.67 Average tax rate: ~33.6776% Difference in net income for 2£ extra gross: 0.75£ or slightly above 60% effective marginal tax so to speak. Looking at the average tax rate, there's hardly any difference at all. Let's look at the other end: Gross Income: £125,000 Allowance: £70.00 Net income: £75,640.66 Average tax rate: ~39.487% I'd like to compare this to CAD again. Most expensive province of Quebec again. It's about 208,000 CAD. Gross Income: 208,000 Net income: 122,953 Average tax rate: 40.89% Marginal tax rate: 49.96% So about 123k or about 73.8k£. Do keep in mind of course that all of this is without taking into account various family or work situations in either case. Especially in said expensive province of Quebec, child care services are available in various ways like you describe for the UK. E.g. the 9$ per day day-care spots where the price also goes up with your income level, so the same kind of calculation you made for the UK could be made there. The more you earn, the more of your own money you have to use. In a province like Alberta, where your average tax for the above 208k is only around 33% you don't have day-care spots like that and will pay a lot more money for said services. Things like pension payments reduce your income before being input into this calculation. I.e. you could earn 250k CAD but put 42k into an RRSP and you'd end up back at the exact same calculation as above with 208k of taxable income.