Comment by olivermuty
9 days ago
That is not how marginal tax works. Marginal tax is… uh… tax on the marginal part?
It is funny you say these are well known and documented, yet provide no links or sources.
9 days ago
That is not how marginal tax works. Marginal tax is… uh… tax on the marginal part?
It is funny you say these are well known and documented, yet provide no links or sources.
Apologies, I thought "well known and documented" implies it should be easy to find", but here you go:
https://www.gov.uk/income-tax-rates https://www.gov.uk/tax-free-childcare
For other readers who don't want to go through that:
Say you earn £99,999 and get a pay rise to £100,000 and have two pre-school aged children, you lose £4000 (£2000 per child) per year, so you now earn less.
Now for the next ~£25,140 you earn you'll pay an effective tax rate of 60%, so from £99,999 you first have to hit ~£110,000 to break even, then it's ~60% tax up to £125,140, then beyond that it's 45%.
This has nothing to do with marginal rates and everything to do with weird means based credits though.
That said, I agree that is pretty stupid.
The only connection to marginal tax rates is that the pay bands line up though?
But also it's a childcare tax credit? Like you will only receive this in it's total value for maybe 4 years assuming you have two very close in age kids, and then lose it entirely 1 year later because they would both have started primary school.
And you wouldn't be receiving it at all if you didn't have children.
Like I would choose to not means test such a policy were in charge, but it's also got nothing to do with marginal tax rates - it's why liberals like me generally oppose means tested welfare policies (because it costs more to deliver and tends to deliver less).
Yes, I think you're spot on there.
You also don't have childcare costs once they go to school, so the loss of that outgoing makes up for the loss of the tax credit.
I'm also liberal, and I think that everyone should be given the child tax credit, if the government wants you to work, and earn, and have children (it does), the tax credit is an effective way to help everyone work harder and earn more.
The issue I've been trying to describe, is that after you've already had children, and you then hit 100k, you lose it entirely, making you 2k per child worse off, so let's say you get to 100k, and you already have two children in childcare, you lose 4k, then you get a pay rise to 110k, with the loss of the 4k and at the same time you also hit a marginal tax rate of 60%, you now earn exactly the same as you did at 100k.
If you got a with-inflation pay rise every year from 100k onward, you'd be earning less for almost all of that time until those children go to school.
Lowering the higher band threshold to 100k from 125k and not tapering the personal allowance would actually leave you better off.
EDIT: Typo in my numbers (100k > 110k).