Memo to 50p tax trashers, #2: The effective tax rate is hardly ever 58p

Alex Hern further questions the letter to the Telegraph supporting the scrapping of the 50p tax rate.


While we’re picking apart the letter from 500 “wealth creators” to the Telegraph, Paul Lewis, presenter of Radio 4’s Money Box, points out that another of their claims also plays loose with the truth.

The letter begins:

Given the state of the British economy, we urge George Osborne, the Chancellor, to consider scrapping the top rate of tax in his forthcoming Budget. The tax, which is in effect a 58p tax after national insurance is taken into account, puts wealth creators like us in a very awkward position.

As Lewis points out, the 50p tax is very unlikely indeed to actually be ‘a 58p tax after national insurance’.

He explains how they came to that figure:

If an employee earns more than £150,000 then to get another £480 into their pocket you do indeed need to pay him or her £1000. That is subject to 50 per cent tax and two per cent NI leaving £480. But the employer also has to pay the employer’s National Insurance which is 13.8% or £138.

So out of a total cost to the employer of £1138 the employee gets just £480. Subtract one from the other and tax of £1138 – £480 = £658 has been paid. So the ‘rate’ of tax is £658 / £1138 = 57.8 per cent.

Except that total is unlikely to ever actually be paid:

These are large companies paying full-rate corporation tax on their profits. The whole cost of paying employees – their gross pay and the employer’s National Insurance charge – is deductible from profits.

So in fact the gross cost of paying someone £1000 is reduced by the corporation tax saved. Corporation tax is currently 26 per cent and falls to 25 per cent from 2012/13. The total extra pay bill of £1138 reduces corporation tax by £1138 x 25 per cent = £284.50. So the net cost to the employer is £1138 – £284.50 = £853.50.

The employee gets £480 in their pocket. And the amount that has disappeared in tax is £853.50 – £480 = £373.50. So the tax ‘rate’ is £373.50 / £853.50 = 43.8 per cent, which rounds up to 44 per cent of the total costs.

Lewis adds:

The only occasion when the net tax take from the grossed up pay would be almost 58 per cent is if the person earning over £150,000 is an employee who is not contracted out of state second pension, and the company makes no profit.

Hardly a titan of industry.

See also:

Memo to 50p tax trashers: Laffer Curve peaks at over 75 per centAlex Hern, March 1st 2012

It’s official: the 50p tax rate raises revenueAlex Hern, January 9th 2012

50p tax: Still a Tory obsession, still not that exceptionalAlex Hern, November 24th 2011

The 50p tax debate: Are we taxing off our nose to spite our face?Luke Bozier, September 16th 2011

Only quarter of voters want to scrap 50p taxWill Straw, August 1st 2011

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