Wednesday, 10 August 2011

UK Income Tax Chart

Here's a chart I made of UK income tax rates in the current year for a person with no special allowances:

The 60% rate at £100,000 appears because the "Personal Allowance" - the zero rate band for low incomes - is progressively withdrawn for incomes above that level.  This was Alistair Darling's idea to get more money out of higher earners without increasing headline tax rates.  George Osborne evinced no pain in adopting the scheme.

This chart includes Class 1 National Insurance payments also - they are levied on employees on a weekly rather than an annual basis: I've assumed full-time employment.

There's another blip in the graph at an annual income of £42,475 where the 40% tax band starts, because the lower National Insurance rate (2% instead of 12%) starts at a slightly higher level.

In a rational world, we would abandon the artificial distinction between Income Tax and National Insurance.  We would determine an appropriate shape for the marginal tax curve - preferably piecewise linear and non-decreasing.  And we would apply a multiplier to the curve to raise what revenue the government deems appropriate.

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