16 August 2022
Currently, most UK employees earning more than £12,570 will handover at least 33.25% of any bonus or pay rise to HMRC through a combination of income tax and employees’ National Insurance contributions (NICs).
In addition to paying income tax and NICs, employees may be subject to other charges on their income, including the high-income child benefit charge (HICBC) and student loan repayments. The HICBC results in a gradual clawback of child benefit received by a household where the highest earning partner earns more than £50,000 in a tax year. Student loan repayments are taken as 9% of earnings above the repayment threshold (currently £20,195 for Plan 1 members and £27,295 for Plan 2 members). In addition, an increase in income can also result in some other quirky tax impacts, for example the withdrawal of the marriage allowance, which is only available where one spouse (or civil partner) is a basic-rate taxpayer and the other’s income falls within the personal allowance.
The scenario below shows an English resident taxpayer receiving a 10% pay rise from their employer, increasing their salary from £50,000 to £55,000. This taxpayer has:
- three children, for whom child benefit is received by the taxpayer (or their partner);
- a (Plan 2) student loan; and
- a partner earning less than £11,310.
From the £50,000 salary, they presently receive a net income of £35,674. From their £5,000 pay rise, their net annual income will increase by less than £850 to just £36,517. The net effect is that a staggering 83% of a £5,000 pay rise could be paid in tax and other non-voluntary deductions.
The deductions from these pay packets can be broken down as follows:
|£50k earner||£55k earner|
|Student Loan (P2)||(2,043)||(2,493)|
*£252 of the increase in income tax is due to the withdrawal of the marriage allowance
Most of the pay rise falls in the 40% income tax bracket, however, the underwhelming increase in net pay can also be attributed to:
- the HICBC resulting in 50% of the household’s child benefit received being clawed back;
- the increase in student loan repayments; and
- the loss of the benefit of the marriage allowance (as it is only available to basic rate taxpayers).
The marriage allowance was introduced in 2015 when the higher rate threshold was a little more than £42,000, however, the threshold has increased over time and is now £50,270. The HICBC was introduced in 2013 and the threshold for repayment – £50,000 – has remained the same ever since. Due to the proximity in thresholds, it is now likely that a taxpayer will exceed both thresholds at once and be hit with an eye-watering tax charge, as set out above.
The marriage allowance is a valuable relief to lower-income families and its introduction and the gradual increase in value of the benefit has been welcomed. At the start of this month, HMRC issued a press release urging taxpayers to claim the marriage allowance where appropriate. The HICBC, on the other hand, was not fondly welcomed when first introduced and the unchanged repayment threshold has resulted in it catching more and more taxpayers. As taxpayers start to appreciate the true impact of the HICBC on their new pay packets, we could see renewed calls for the charge to be scrapped, or at least for the thresholds to be increased. In just a few weeks we will have a new prime minister, who may seek to reduce the rates of taxes that apply to individuals. However, the above illustration shows that other attributes of the tax system, such as allowances and thresholds, can also have a significant impact on the tax burden for individuals.