Thursday 26 May 2011

The Taxman Gets More Than You Think! (UK)

Nobody likes paying tax, although we all know that a lot of it goes towards essential goods and services (a lot but not all...). We all need to pay our share - but I'm not sure I want to pay more than I have to!

However, I hadn't really thought about how much tax our earning (and spending) results in - the answer is quite amazing really.

The following is based on an idea from a recent Moneywise article - developed a little further.

Here's a simple question: assuming you are a basic rate taxpayer, how much does the Taxman (in my case, the UK Taxman) receive for every after-tax £1 that your spend?

If you're a UK basic-rate taxpayer, for every £1 you earn over the £7,475 personal allowance, the taxman will get 20p in income tax. On top of that, HM Revenue & Customs (HMRC) will receive 12p in employee national insurance (NI) and a further 13.8p in employer NI. That's a total of 45.8p so far for the taxman, 32p of which has come out of your pocket - so your original £1 has fallen to an after-tax 68p.

Restating this in terms of each after-tax £1 (excluding your tax-free allowance): you will have paid 47p (32 x 100 / 68) in income tax/NI and your employer will have paid 20p in NI.

If you spend that taxed £1 on something that is subject to VAT, HMRC will get a further 20p. So you will personally have paid 67p in tax for each  £1 spent.

And with the employer's NI payment, the Taxman will have pocketed an amazing 87p for every after-tax £1 that you spend. The tax take is even higher for higher-rate income tax payers.

Amazing. And a good reason to take full advantage of  any tax allowances that you are entitled to - as we encourage here at the DIY Income Investor.

Update: an article in This is Money reported that the Taxman takes nearly half of a typical family's income.

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


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