Your marginal rate on earnings would initially be 20% for earnings up to an amount equal to the personal allowance.
Thereafter it would be 30%, but only for the next £2k of earnings (or whatever the width of the 10% band is), after which it would revert back to 20%.
So if PA is £5k and 10% band is £2k wide, and you had savings interest of £7k, so that your tax bill would be 10% of £2k, then taking on earnings of £10k would add 20% of £5k, plus 30% of £2k, plus 20% of £3k to your bill.
I beg to differ. It would initially be 30%. See below.
Let's go with your bands as they are nice round numbers.
The only assumptions I'm going to make here are that savings income continues to be treated as the top slice, and that we will still have a starting rate band but with differing rates for earned and unearned income (just like is currently the case for the basic rate band). Both are reasonable assumptions IMHO.
If you had savings interest of £7000 your tax liability will be, as you say,
10% x (£7000-£5000) = 10% x £2000 = £200.
But the marginal rate on any additional earned income is the amount of tax you effectively have to pay out of your first £1 of gross earned income.
If you earn £1 of additional income, you have total income of £7001. £5000 is covered by the personal allowance leaving £2001 of taxable income. The crucial point is that the savings income is treated as the top slice of taxable income. This has the effect of displacing interest from the starting rate band to the basic rate band. So the tax liability would be worked out as:
Tax on earnings in the starting rate band: £1 x 20% = £0.20 Tax on interest in the starting rate band: £1999 x 10% = £199.90 Tax on interest in the basic rate band: £1 x 20% = £0.20
Total tax = £0.20 + £199.90 + £0.20 = £200.30
The tax has risen by 30p due to additional earnings of £1, so marginal rate
30%.
Clearly this 30% marginal rate will continue to apply until earnings exceed £2000 (assuming the basic rate band is >=£2000 wide).
I'd be willing to place an evens bet that one of two 'refinements' will be added before this comes into effect.
Either the 10% starting rate will be rescued for earned income (to much cheering from Labour backbenchers), or it will be abolished completely even for unearned income (which will pass by quietly because not many people are aware that it isn't being abolished).
Why? Well, a lot of people seem to think that the 'abolition of the starting rate band' to pay for general basic rate reduction is unjust, as it benefits higher earners at the expense of lower earners.
When it becomes clear to them that the starting rate band has not been abolished at all, but still exists to facilitate a low 10% rate on
*unearned* income, accessible only to people with peculiar finances, the resentment will probably deepen.
AFAICS the only people who can benefit from this 10% rate are people with little or no earned (or pension) income but with interest income from a substantial pile of cash. (Substantial, at least from the point of view of the kind of people who stand to be losers from the overall trade-off.)
(Watch out also for the 'simplification' of dividend tax rates to 20% and
40% (rather than the current 10% and 32.5%), without any corresponding adjustment in the value of the attached tax credit!)
NO! - It displaces the interest first from the "personal allowance" band.
"Clifford Frisby" wrote
^^^ Here's your mistake. ^^^ There is NO earned income in the starting rate band, the whole 1 is covered by the personal allowance (plus a further 4999 of interest).
"Clifford Frisby" wrote
^^^ This should be 2000 x 10% = 200.
"Clifford Frisby" wrote
Correct.
"Clifford Frisby" wrote
Try: Total tax = 0.00 + 200 + 0.20 = 200.20
"Clifford Frisby" wrote
No, tax rose by 20p, so marginal rate is 20% (as RR stated earlier).
"Clifford Frisby" wrote
The (revised from your 30% to the correct rate of) 20% rate applies until earnings exceed 5000, when all of the interest in the "personal allowance" band has been displaced to the basic rate band. Then interest is displaced out of the starting rate band into the basic rate band, incurring an extra 10% tax on top of the
20% now payable for extra earnings, giving 30% total (for the next 2000 earnings) -- exactly as RR stated earlier (see below).
So if a person has 5k of earned income plus 2k of unearned income (B/S interest, etc.) will the 2k *still* be taxed at 10%? Or will the 2k unearned income plus 3k of the earned income be deemed to be using up the allowance, leaving 2k of *earned* income to be taxed at 20%?
Earned and unearned income are like people in two bus queues waiting for the same bus. Earned income people are in priority queue.
The personal allowance (which is like a 0% band) and the starting, standard, and higher rate bands are like buses.
The first bus (0%) lets people board from the priority queue until either the bus is full or the queue is empty. If the bus is full, it drives off and everybody left behind has to wait for the next bus (the 10% one). If the priority queue is empty, people from the ordinary queue are allowed on. Everyone who *is* allowed on the 0% bus can travel for free.
When the 10% bus comes, everyone getting on must pay the 10% fare. People from the earner queue get on first but have to pay double from next year. This year they still just pay the ordinary fare. Then, if there is still room on the bus, people from the saver queue are allowed on.
Once the 10% bus is full, folk have to wait for the 20% buses, on which everyone has to pay 20%. Earners still get on before savers, and (for now) have to pay a 2% surcharge, but this will be abolished from next year.
After a while there will be no more 20% buses and we're on to the 40% luxury coaches.
Dividend earners stand in an even lower priority queue, but have been pre-issued with vouchers which let them travel for free on the 10% and 20% buses (provided they can get on), and allow them half price travel on the luxury coaches.
That's useful - thanks. Can someone remind me what the mooted nil-rate band for next year is? Is it going up to compensate for the loss of the 10% band on earned income - or is such 'compensation' only coming from a reduction in the basic rate to 20%? If the latter, my wife is going to get clobbered because she has 'earned' income (occupational and state pensions) which currently use up the nil-rate and most of the 10% bands - so she'll be paying an extra 10% on nearly a couple of grand.
It's only going up with inflation, except for over 65's who are getting a significant rise.
Only if you're over 65.
Plus an increase in the lower threshold for tax credits. Pensioners and those with a single low income who are eligible for tax credits will be better off. If the low income is a second household income, or the claimant is not eligible for tax credits (eg under 25) then they'll probably be worse off.
She'll be better off if she's over 65, probably worse off if she's under 65.
Is that in the form of a higher basic allowance for over 65's - or simply a higher age allowance which is progressively taken away if total income exceeds a certain amount? I'm over 65 but currently get no age allowance because my total income is too high. Will that change?
She's under 65 - so it looks like she'll have to wait a couple of years before she can benefit.
No, unless you're close to the limit in which case as the age allowance is bigger you can earn more and still get some of it. But you will be better off regardless, because of the basic rate being cut to 20% - if you earn too much to get the age allowance then the 2% cut in the basic rate will gain you more than the 10% band abolition will cost you. And as you're over 65 you won't get clobbered by the NI increases.
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