UK income tax is assessed by dividing your income into chunks and you are taxed at a different rate on each chunk. So currently, the top rate of tax is 45% for those earning above £150,000 per year. So if you are earning £150,001, do you pay 45% of this in tax? Absolutely not.
You pay 0% on the first £11,500 (sometimes referred to as your ‘personal allowance’, you are assessed tax-free on the first £11,500 regardless of your total earnings). You pay 20% on the next chunk, from £11,501 to £45,000 and then 40% on the next chunk from £45,001 to £150,000. Only if you are earning more than £150,000, will any amount above this amount be assessed at 45%. What Labour have said they will do is introduce the 45% rate at £80,000 and a new rate of 50% at £123,000.
So let’s look at some real world examples. If you earn £200,000 a year, you are currently paying nothing on the first £11,500, plus £6,700 on the next chunk (£11,500 to £45,000 @ 20 per cent), plus £42,000 on the next chunk (£45,000 to £150,000 @ 40 per cent), plus £22,500 on the next chunk (£150,000 to £200,000).
This is a total of £71,200 out of £200,000 in income tax, or 35.6%
So what about under the new proposal? Under Labour’s tax plans, you would pay £0 on the first chunk (£0 to £11,500 @ 0%), plus £6,700 on the next chunk (£11,500 to £45,000 @ 20 per cent), plus £14,000 on the next chunk (£45,000 to £80,000), plus £17,200 on the next chunk (£80,000 to £123,000 @ 40 per cent), plus £38,500 on the next chunk (£123,000 to £200,000 @ 50 per cent).
This is a total of £76,400 of £200,000 in income tax, or 38.2%.
So on a salary of £200,000 per annum, your tax liability has gone from 35.6% to 38.2%.
Note the following points:
1) If you earn less than £80,000 a year, you are totally unaffected by this change.
2) No one is paying “half their income in tax”.
Note, this does not even begin to cover the fact that if your salary is at this level, it is likely that your package includes other benefits, eg. shares.
Nor does it cover what taxation is spent on.
Nor does it cover the reason why you might want a progressive tax system, rather than regressive stealth taxes that hit low earners disproportionately.
It is simply to debunk the myth that a top rate of tax of 50 per cent means you are paying half if your income in tax.
Next time you hear someone say this, please help to debunk this myth, the only purpose of which is to make what is after all, one of the fairest ways for a government to raise money into a political hot potato.