Wednesday, May 14, 2008

Income Tax - it's not a U-turn, it's an adjustment

As you may or may not know the Chancellor announced a mid-year alteration to the current tax bands. If like the media that's all you read then you've probably got no real idea what this means. Better to read the HMRC's own version of this which gives you both figures for the new bands.

Okay, the hassle is no-one is talking about national insurance thresholds, it's only a measly 11%/1% split so who cares. Well it makes a difference, compare my original percentage difference graph below for income tax with the one next to it which includes national insurance

See that dip in the middle, that's caused by the inclusion of people into the 11% band who used to be in the 1% band. So with no data I have to assume that the bottom rate of NI matches the allowance for Income Tax (as it has so far) and that the top rate isn't being changed.

So with those assumptions taking the differences from the 07/08 rates we end up with the following graph, the blue line representing the percentage differences from 07/08 to the current 08/09 rates and the pink line the percentages differences from 07/08 to the newly announced figures.

At first glance it appears everything has just been shunted upwards, but notice the convergence starting at the £42k mark; as stated the high earners will barely notice any difference at all.

So is this a good thing or not? Well everybody is above the line now, but the government have needed to borrow another large chunk of money at a time when nobody wants to lend any. Ah well time will tell.