Thursday, December 03, 2009

Income Tax and National Insurance

Having mentioned the bankers' bonuses and tax implications I took a look at my tax spreadsheet and realised I hadn't created a new 09/10 set

Easily remedied I  added in the new figures and checked the calculations worked. See it's a pain at times. You take the gross annual pay and you remove the allowance set for income tax and charge the remainder it at 20%, unless it's over a set amount in which case you charge that at 20% and everything over at 40%.

For National Insurance you do the same thing with different figures. Oh wait no you don't.

That's where it gets funky, the amount for Income Tax is an allowance, you can earn up to this amount and pay tax on the remainder. For National Insurance it's a threshold, you can earn up to this amount, but over you pay tax on the full amount.

Looking at this again I wondered why this was set up this way "What if the NI thresholds were treated as allowances", I thought. So keeping the values and percentages the same I created a new sheet and compared the two. Then I compared the two again. Then I went through all my calculations to find out where I'd gone wrong. Then I finally acknowledged I hadn't got anything wrong and what I was seeing was correct.

There was no difference. From an annual income of £1,000 up to £43,000 absolutely no change in the amount paid in tax; After £43,000 however there was.

Everyone above the upper NI threshold (which I was now treating as the second band allowance) paid more employee NI contributions. At the first simple salary above it (£44,000) contributions had gone up from £4,198.85 to £4,211.35 and so on up the chart. Using the 07/08 quintiles with the highest gross salary at £47,747 resulted in a jump from £4,236.32 to £4,623.52. But that's using a different allowances. What if the same allowance (income tax) was used with the same different percentages?

Everyone below £44,000 pays less NI; everyone above pays more, but less than they would using my original NI 'allowance'. that £47k salary NI contribution increases to £4,539.92 instead of £4,623.52 a rise of £303.60 instead of £387.20.

So two payroll tax systems using different calculation methods results in anyone over £44,000 paying less tax. Now logically if would make sense to have both systems using the same method just with different figures; in computer terms you'd have one function to which you'd pass the correct figures too. So why don't we have that hmmm? Wouldn't be because everyone earning over £44k would be paying more would it?


Orphi said...

Never attribute to malice what can be explained by incompetence. ;-)

I suspect the two systems were simply devised by different government committees or something…

FlipC said...

Oh quite, both systems came into force at different times and for different reasons. However since then they've faffed with the rates and, in the case of income tax, the bands.

So not one person thought about using the same calculation method for both?

You know I might drop a line to my MP (the Independent Dr Richard Taylor) mentioning this. After all the only people it affects are those at the really high end of the spectrum.

Sigh but inertia will kick in, all those software payroll systems will need to be rewritten... which will stimulate growth in that sector; hmmm.

Orphi said...

Ah. So “stimulate growth” is actually a euphemism for “fix the stuff that wasn't done right the first time”? :-D