Most ludicrous income tax anomaly of all
Discussion
Spent time today helping a friend who’s done self assessment for the first time, income just coming in below the higher rate bracket for 2022/23.
But we looked at forecast figures for 2023/24 given there’s only a couple of months left on the fiscal year.
Without taking mitigating action my friend will be stung very severely by income tax on savings income by only just breaching the 40% tax threshold.
I looked into this and had a play about with some tax calculators. I think I’m right in saying that in the most extreme case the effective tax rate could be 20,040%!! YES - TWENTY THOUSAND (and forty) PERCENT.
If you earn £1,000 or more in savings income (which is only approx £19k/£20k of savings) and you earn just over the higher rate threshold of £50,270.
Is this for real? How can the Treasury have failed to plan for this?
But we looked at forecast figures for 2023/24 given there’s only a couple of months left on the fiscal year.
Without taking mitigating action my friend will be stung very severely by income tax on savings income by only just breaching the 40% tax threshold.
I looked into this and had a play about with some tax calculators. I think I’m right in saying that in the most extreme case the effective tax rate could be 20,040%!! YES - TWENTY THOUSAND (and forty) PERCENT.
If you earn £1,000 or more in savings income (which is only approx £19k/£20k of savings) and you earn just over the higher rate threshold of £50,270.
Is this for real? How can the Treasury have failed to plan for this?
I asked a similar question a while ago, and Eric advised that the tax free interest allowance is set by your income. The interest itself doesn't affect the allowance if when added to your income the total is over £50,270.
Your argument still works for incomes of £50,270 and £50,271 though. Assuming £1,000 interest, the former pays no tax the latter pays £200 tax, so the extra £1 income creates an extra £200 tax liability.
Your argument still works for incomes of £50,270 and £50,271 though. Assuming £1,000 interest, the former pays no tax the latter pays £200 tax, so the extra £1 income creates an extra £200 tax liability.
Edited by Rufus Stone on Wednesday 31st January 03:09
Eric Mc said:
These complications and anomalies occur when you introduce arcane and frankly weird thresholds and band restrictions in an order to collect more tax whilst at the same time saying you aren't increasing tax rates.
It's duplicitous and dishonest.
Agreed. The buggering about with thresholds, tapers, reduced allowances etc is utterly daft now. I know I'll be tarred and feathered as a raging communist for saying it, but I'd happily pay a bit more income tax via a straightforward increase of the headline rates if they could just stop this nonsense. The cliff-edge at £100k for childcare stuff is daft too (and in absolute terms can be much worse than the example posted here). It's duplicitous and dishonest.
Yup. If all income was treated the same, you wouldn't need this kind of nonsense. Why not just treat savings interest as income? It probably made sense to not have the administration overhead for small amounts in the olden days, but these days your bank account is linked to your tax account and it could just be seamless.
Roger Irrelevant said:
Eric Mc said:
These complications and anomalies occur when you introduce arcane and frankly weird thresholds and band restrictions in an order to collect more tax whilst at the same time saying you aren't increasing tax rates.
It's duplicitous and dishonest.
Agreed. The buggering about with thresholds, tapers, reduced allowances etc is utterly daft now. I know I'll be tarred and feathered as a raging communist for saying it, but I'd happily pay a bit more income tax via a straightforward increase of the headline rates if they could just stop this nonsense. The cliff-edge at £100k for childcare stuff is daft too (and in absolute terms can be much worse than the example posted here). It's duplicitous and dishonest.
I looked at a Dutch Tax return, and there were only 3 fields in it to fill in....
Sometimes I think it suits the Treasury to have it so complex, as they likely capture additional revenue by way of these anomalies.
Having said that, their administration overhead and potential lost revenue must be real risks too with this approach.
Ultimately it’s political. The loss of threshold at £100k and the loss of child benefit off individual rather than household income could both be wiped out tomorrow if the Government so wished. These would previously have been obvious Tory core policies aimed at middle class workers.
But middle class workers aren’t who the Tories stand up for anymore.
Having said that, their administration overhead and potential lost revenue must be real risks too with this approach.
Ultimately it’s political. The loss of threshold at £100k and the loss of child benefit off individual rather than household income could both be wiped out tomorrow if the Government so wished. These would previously have been obvious Tory core policies aimed at middle class workers.
But middle class workers aren’t who the Tories stand up for anymore.
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