The £10,500 cost of a £1 pay rise for high-earning families
Jeremy Hunt has been urged to address “cliff edges” in the tax system that can result in higher-earning families losing out on £10,500 from a £1 pay rise. Thousands more workers are at risk of falling into these traps because of fiscal drag, where tax thresholds stay the same and rising wages push workers into higher tax brackets. Under current government plans, the tax thresholds are frozen until 2028. With average wage growth running at 7.7pc, according to the Office for National Statistics, more are tipping over the thresholds where marginal tax rates can be at their highest. Many workers pay a tax rate far higher than 45pc (the top income tax rate) because of the withdrawal of allowances and benefits at these cut-off points. In some cases, the rate can be as high as 99pc. The Centre for Policy Studies, a think tank, is among those calling for the Government to address high marginal rates in next week’s Autumn Statement. The £100,000 cliff edge Cost of £1 pay rise: £10,500 One of the most severe cliff edges in the tax system kicks in once a parent earns more than £100,000. This is because once you start earning more than £100,000 you begin to lose both your tax-free personal allowance and your ability to claim 30 hours free childcare. The personal allowance also drops by £1 for every £2 earned above this amount, until it disappears at £125,140. On top of this, parents lose two lucrative parts of childcare support. Once one of them earns over £100,000, the number of free childcare hours they can claim from the Government drops from 30 to 15. They will also lose their tax-free childcare, which lets parents claim up to £2,000 a year per child to help with the cost of care. Crossing over the £100,000 threshold would therefore cost a two- child family £4,000. The graduate tax sting Marginal tax rate: 99pc The introduction of student loans has only worsened the impact of high marginal tax rates. A Plan 2 Student loan effectively works out at 9pc tax for those earning more than £ 27,295. Post-graduates pay an extra 6pc above the £21,000 threshold. A post-graduate earning £124,150 who receives a £1,000 pay rise would keep only £6.50 – an effective tax rate of 99pc – owing to the loss of the personal allowance as well and the 45pc tax rate. This also assumes they have £500 in savings, which is then taxed at the 45pc rate. ‘The child benefit tax charge kicks in once the income of the highest earner exceeds £50k’ Marriage allowance Cost of £1 pay rise: £252 The marriage allowance lets couples transfer up to £1,260 of their personal allowance to the other. It was introduced in 2015 near the end of the coalition government after David Cameron, prime minister at the time, said he wanted to recognise marriage in the tax system. However, you can only claim the marriage allowance if your partner is a basicrate taxpayer earning between £12,571 and £ 50,270. For someone earning £ 50,270, an extra £ 1,260 allowance would save them £252 each year. As soon as they earn more than this, the marriage allowance is lost – costing them £252 in tax. The child benefit tax charge Marginal tax rate: up to 79pc Sean McCann, of advice firm NFU Mutual, said one of the biggest traps is the “potential triple whammy” that can hit families once the income of the highest earner exceeds £50,270. “Not only do they start paying 40pc income tax on earnings above that level, if their partner is a non-taxpayer, they also lose the marriage allowance worth up to £252 each tax year. In addition, couples with children are caught by the child benefit tax charge once the income of the highest earner exceeds £50,000.” The high income child benefit charge claws back child benefit from a household where one parent earns more than £50,000. Child benefit for your first child is £1,248 per year and £827 for each subsequent child. As soon as one parent passes the £ 50,000 threshold, child benefit is clawed back at a rate of 1pc per every £100 that they earn, until it is lost completely when their income exceeds £60,000.