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Why some workers will pay 93pc tax

tax bills
tax bills

Some workers are paying an effective top tax rate of 93 per cent, a new analysis has shown.

Taxpayers crossing certain tax thresholds will see pay rises “arbitrarily” and “unfairly” swallowed up by the erosion of tax allowances and benefits. They could effectively be taxed at rates as high as 60pc – or even 93pc.

The tax burden has been made worse by Jeremy Hunt's Autumn Statement, which lowered the starting level for top-rate tax from April next year.

An extra 232,000 taxpayers are now expected to pay additional rate tax as a result, joining the existing 600,000 or so people already caught.

Many people in high-paying sectors such as law, banking and software development often earn high salaries while still paying off their student loans.

Mike Warburton, the Telegraph's tax columnist and a former director at Grant Thornton, said today's so-called marginal tax rates were the highest since 1979.

He said: "These high marginal tax rates are the result of politicians attempting to limit tax relief and benefits for those on higher incomes. This may be understandable politically but it both adds to complexity and provides a disincentive to work extra hours."

These high marginal rates – which only apply to portions of your income – are the result of successive governments tweaking the tax system and clawing back benefits that their predecessors have introduced.

The personal allowance is tapered away at a rate of £1 for every £2 of income for those earning between £100,000 and £125,140, which works out at an effective 60pc tax rate.

But once earners earn more than £125,140 and, from April 2023, pass into the additional-rate bracket, they will not only start paying income tax at 45pc but also lose their personal allowance of £12,750 completely.

If they are a graduate who started university after 2012, the effective tax rate will be even higher.

This is because student loan repayments kick in once graduates earn over £27,295 a year, hitting them with an effective extra tax rate of 9pc.

Becoming a top-rate payer also means losing the "savings allowance", which covers income generated by money held in savings accounts. Basic-rate taxpayers can earn up to £1,000 and higher-rate payers £500 in interest before having to pay tax. But additional-rate taxpayers lose their allowance entirely, meaning they pay tax on any interest earned outside of an Isa or pension.

So a £124,150-earner who graduated in the last ten years and received a £1,000 pay rise would pay an effective tax rate of 93pc, once you add in National Insurance. They would take home only £66.50 of their pay increase. The calculation assumes they also have savings income of £500 a year.

Laura Suter of AJ Bell said: “Rather than having a neat system of taxation that everyone can understand, we’ve got a jumbled mess of different tax rates left by successive governments.

“What’s worse is that most taxpayers won’t be aware of the bizarre array of different allowances and rates, meaning they will be chuffed with a payrise and won’t realise the sting in the tail that’s coming.”

The Autumn Statement was a missed opportunity to address these huge marginal rates of tax, tax experts and think tanks have said, which can prove a disincentive to work.

Daniel Pryor of think tank the Adam Smith Institute said: "Nobody should lose most of their pay rise to benefit withdrawal.

Marginal rates reform won't grab the headlines on Budget Day, but politicians must explore ways of making our tax system simpler and fairer. If we want to boost growth and raise living standards for everyone, work must always pay."

A Treasury spokesman said: “We’re committed to protecting those on low incomes which is why have steadily increased the tax-free personal allowance since 2010 to make it one of the most generous in the world, where 30pc of people have been taken out of paying income tax altogether, and over 80pc of taxpayers pay the basic rate – something only made possible by responsible management of the public finances.”