{"id":10774,"date":"2023-09-24T10:09:45","date_gmt":"2023-09-24T09:09:45","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=10774"},"modified":"2023-11-21T09:46:58","modified_gmt":"2023-11-21T09:46:58","slug":"70percent","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/09\/24\/70percent\/","title":{"rendered":"Why cutting 70%+ marginal rates should be a Government priority"},"content":{"rendered":"\n

If I was a Tory Chancellor, I wouldn\u2019t abolish inheritance tax. I\u2019d fix the ridiculous marginal rates that mean there are hundreds of thousands of 30-somethings paying more than 70% tax on every additional \u00a3 they earn.<\/em><\/strong><\/p>\n\n\n\n

This is complicated, unfair and a disincentive to work; it could also plausibly be holding back growth. Any government serious about fixing the tax system should start here.<\/strong> <\/p>\n\n\n\n

UPDATE 20 November 2023 to take account of the uprating of child benefit.<\/strong> And more here on the ghastly mechanics of the High Income Child Benefit Charge<\/a><\/strong>. Also please note that the figures in this article are for the UK excluding Scotland – the Scottish rates are higher.<\/p>\n\n\n\n

Here’s a speech<\/a> from the last time a Conservative Chancellor cut taxes:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

But 45% isn’t the highest rate. Not even close. There are millions of people paying more than 60%. And hundreds of thousands paying much more – some even over 100%. <\/p>\n\n\n

The marginal rate<\/h2>\n\n\n

If you want to know your take-home pay, then it’s your effective rate of tax that’s important – total tax you pay, divided by gross wage (more on that here<\/a>). Earn \u00a350k, you take home about \u00a338k after tax, so your effective tax rate is 24%.<\/p>\n\n\n\n

The marginal rate of tax is different and more subtle – it’s the percentage of tax you’ll pay on the next \u00a3 you earn. Irrelevant to where you are now, but highly relevant to your future, because it affects your incentive to work more hours\/earn more money.1<\/a><\/sup>Everything interesting happens at the margin. For more on why that is, and some international context, there’s a fascinating paper by the Tax Foundation here<\/a><\/span>.<\/p>\n\n\n\n

The marginal rate of tax in the UK for high earners in theory caps out at 47% (45% income tax and 2% national insurance2<\/a><\/sup>Note that I’m not including employer’s national insurance here. Employer’s national insurance is absolutely a tax on labour in the long term, because it reduces pay packets in the long term. But it’s not usually included in a calculation of a marginal tax rate, because it’s not economically passed to you in the short term, and so it won’t rationally affect your decision whether or not to work more hours. There’s a good explanation of this point here.<\/a><\/span>) once you get to \u00a3125,140k. I’m not terribly convinced this disincentivises anyone to work (and I spent many years working in an environment surrounded by colleagues and clients paying tax at this rate). But people earning much less than \u00a3125k can have a considerably higher rate, principally due to four effects:<\/p>\n\n\n\n