I did an exercise today to understand the tax trap in the UK that heavily penalizes middle class families with children. Here are the results.
Sources:
- Income tax bands: https://www.gov.uk/income-tax-rates
- Child benefit: https://www.gov.uk/child-benefit-tax-charge
- Childcare hours: https://www.gov.uk/check-eligible-free-childcare-if-youre-working
- Student loans: https://www.gov.uk/repaying-your-student-loan/what-you-pay
Tools:
- Data + Charts created with Google Sheets
- Annotations created on charts with Excalidraw
PS: reposting, since mods deleted my previous post for lack of sources and tools.
by MolecularDev
16 Comments
Sources:
– Income tax bands: https://www.gov.uk/income-tax-rates
– Child benefit: https://www.gov.uk/child-benefit-tax-charge
– Childcare hours: https://www.gov.uk/check-eligible-free-childcare-if-youre-working
– Student loans: https://www.gov.uk/repaying-your-student-loan/what-you-pay
Tools:
– Data + Charts created with Google Sheets
– Annotations created on charts with Excalidraw
A salary of 87k puts you in the top 5% of earners, this affects a very small number of people and there isn’t many metrics where you canl really call it “middle” anything
Unless you’re secretly Jeremy Hunt I suppose, in which case you have previous for erroneously calling this a middle class income
This nicely shows how a few well-intentioned measures which sound like common sense can add up to a perverse outcome nobody would create deliberately.
Don’t go to uni, don’t have kids, and don’t earn over 50 k a year?
unrelated to the post directly but it’s really annoying that mods would remove a post with lots of interesting discussions and 700+ comments, instead of letting OP amend the original post with the missing info
You can live very comfortably in the UK on £50k+. The real loophole in income taxes are outside IR35 work…
Really nice visualisation. Can you do a version of your last side for 2 children? That’s the situation I’m in currently!
How can the effective tax rate for £50,000 go up to 21% when the basic rate is 20% minus the personal allowance?
A tax system where the very wealthy pay more. Struggling to see the point of this post.
Is the 100k threshold including bonuses?
If I were to make over 100k but would like to keep my free childcare hours, would I be able to salary sacrifice into pensions so that I get below 100k to keep my free childcare hours please?
Not sure paying back a loan can be considered a ‘tax’.
There’s probably a seperate discussion about tertiary education and the cost of it
Playing devils advocate, getting to 100k+ takes time is it safe to assume
student loans would generally be repaid by this point (and that’s classing repaying a student loan as a tax, and not taking the view that it as a repayment of a debt that’s been agreed to)
Children would either be of school age so no impact in losing free childcare hours or over 18 so no child benefit to worry about?
I don’t know how the UK system works with unemployment benefits. It would be interesting to see that treated as a negative tax to see whether there are sections of the graph where there are disincentives for working more.
I’ll preface this by admitting that I’m only an American who has studied the UK from a potential emigration standpoint and don’t actually live there (yet🤞🏻), but is £100k really considered middle class outside of London?
Also the interesting caveat that someone pointed out to me on one of the UK subs, £100k as a single earner is very different than £100k as a household as far as taxes go.
Simply looking at the data it seems as though a tax structure such as that would discourage people from seeking better pay as moving up in certain areas actually means you bring home less money at the end of the day. About, all you would gain in many cases is more responsibility and stress. Sure, you’re getting paid more. But the government is taking a bigger cut, so in actual terms of bring home pay it’s a wash.
In CA there is a point where making more money makes you less money if you are connected to Medicaid and subsidized childcare or especially if you have subsidized housing with a hard income limit.
Making a certain amount of money forces you off of Medicaid onto subsidized insurance that is often not very good which involves paying more and also paying premiums.
Childcare for low income people can be subsidized(if you get in on a wait-list) and if you make more money you eventually have to pay.
Some subsidized housing has a hard income limit so you go from paying 30% of your income on rent to much higher market rates which can take up 60-70% of your income.
This “trap” is between low income and lower middle class. It can be better to be lower income than lower middle class depending on the type of social programs you subscribe to.
This is because the welfare state isn’t really well thought out. There is a lot of means testing to make sure the government saves money so the programs can get continued funding, but it doesn’t always make sense.
Once you get up into the middle class and upper middle it doesn’t matter anymore, you don’t qualify for much if anything and you have much more money overall than a lower income or lower middle class person.