No party is tackling the ‘stealth zone’ where earnings between £100,000 and £123,000 are currently taxed at 60%. Under the Lib Dems the Income Tax rate will increase to 61.5% and under Labour to 67.5%.
Currently, anyone earning over £100,000 starts to lose the tax-free Personal Allowance by £1 for every £2 earned, reducing to zero when gross pay reaches £123,000. The reduction of the Personal Allowance creates an Income Tax zone equal to 60% on the top slice of £23,000.
With Brexit negotiations due to start after the election, parties should be mindful of the ‘stealth zone’ which will make the UK less competitive to continue to attract senior professionals in public and private sector posts, when compared to other countries’ tax rates.
Research by Blick Rothenberg shows how the three main parties’ pledges on Income Tax and National Insurance would affect workers’ take home pay.
The attached tables and graphs compare workers’ take home pay under the known tax pledges of the Conservatives, Labour and the Lib Dems.
The pledges are not all effective immediately. The figures therefore assume a hypothetical point within the next term of government when whoever is in power have fully implemented their proposals.
How workers are affected between the parties’ pledges within different salary levels is commented on below. How those workers are affected between the manifesto pledges and current take home pay is then shown in italics.
- 1. Workers below £50,000 per annum will notice little difference between today’s take home pay and all party manifestos.
- 2. Workers between £80,000 and £100,000 per annum gain most from the Conservative manifesto.
For every £2 earned in the ‘stealth zone’ there is currently an Income Tax charge of 40% ie £0.80.
In addition, the earner loses £1 from their tax-free Personal Allowance used against other income taxed at 40% so a further £0.40 is paid.
The total tax paid by receiving an extra £2 in the ‘stealth zone’ is therefore £1.20 or 60%.
For those earning below £50,000, the Tories have proposed by 2020 to increase the Personal Allowance to £12,500 and for the 40% higher rate of Income Tax to not bite until total income exceeds £50,000. Labour have not made any pledges in this income range and therefore individuals appear worse off under Labour, even at the £40,000 income level. In comparison, the Liberal Democrats long term policy of moving the Class 1 National Insurance employees’ threshold to the same level as the tax-free Personal Allowance (currently £11,500 and which we have modelled in the graph), would negate the impact of their 1% increase in basic rate tax all the way to around £40,000 of gross annual income. The Conservative proposals are clear that a person whose total income is below £50,000 should gain most, though the results are marginal between all parties.
Comparison to pre-Election tax rates (ie today): A worker on £40,000 gross earnings today will be exactly the same under Labour, but be £115 better off a year under the Lib Dems and £200 better off under the Conservatives.
For earners between £50,000 and £100,000, take home pay begins to diverge. The Tories increased personal allowance of £12,500 and higher rate tax bracket mean that those from £50,000 upwards are only just beginning to pay Income Tax at 40%. On, the other hand the benefit of the Lib Dems’ increase in the National Insurance threshold has by this point ceased to have further effect for earnings above £50,000 but their 1% increase in all of the tiered income tax rates has started to take its toll. For Labour, the threshold for the Additional Rate of 45% is lowered to £80,000. This means that someone with over £91,500 of income in the year (ie including the tax-free Personal Allowance) will begin to be taxed at 5 pence in the pound more than the Tories, or 4 pence in the pound more than Liberal Democrats.
Comparison to pre-Election tax rates (ie today): A worker on £100,000 gross earnings now will be £485 per annum worse off under the Lib Dems, £425 worse off under Labour, but be £1,200 better off a year under the Conservatives.
For earners between £100,000 to £150,000 the policies of the three parties are more noticeably diverged. Under current legislation, for anyone earning over £100,000, an individual’s Personal Allowance is reduced by £1 for every £2 earned above this threshold, reducing to zero when gross pay reaches £123,000. The withering of the Personal Allowance creates an Income Tax zone equal to 60% on the top slice of £23,000.
When employees’ National Insurance of 2% on all earnings above £45,000 is factored in we reach one of the highest effective employee tax rates in the world. This policy was introduced by Labour and continued under the Tory and Lib Dem Coalition. No party proposes to change it, therefore the anomaly in the effective tax rates for income in this ‘stealth zone’ will continue. For the Tories, the effective rate continues at 62%, but the tax rate is increased to 63.5% for the Liberal Democrats and to 69.5% under Labour. A person earning £123,000 would take home only £7,015 from the top £23,000 slice of salary compared to £8,740 under the Tories or £8,395 under the Liberal Democrats.
Those earning over £123,000 would then have their income over this threshold effectively taxed at 52% under Labour’s proposals, whilst for the Tories the tax rate would not rise above 42% until an individual’s income exceeded £150,000. The overall rate then stabilises at 47% under the Tories and 48% under the Lib Dems.
Comparison to pre-Election tax rates (ie today): A worker on £125,000 gross earnings now will be £2,350 per annum worse off under Labour, £850 worse off under the Lib Dems, but be £800 better off a year under the Conservatives.
If you require further information, please contact Frank Nash at Frank.Nash@blickrothenberg.com