Why basic rate taxpayers are paying 40% tax

You may think you know how much tax you pay. If you're a basic rate taxpayer, you may be confident that your income tax rate is 20%, which means you fork over a fifth of everything to the government. This would be bad enough, but in reality it's just the start. A report shows that the real picture is that we hand over almost double that on everything we earn. And higher rate taxpayers on a 40% rate give almost half of everything they earn to the government.

So what's going on?

NI sting
The Centre for Policy Studies says the culprit is National Insurance. This was once ring-fenced to pay for pensions and the NHS. However, long ago this was ditched and nowadays it's just a device used by politicians to tinker with tax rates without seeming to change anything. If you add NI into your income tax rate these massive figures are the result, and reveal the true tax rate you are paying.

High earners
And while things are terrible for most of us, they are incredible for higher earners. As soon as you start earning £100,000, your tax rate becomes punitive. Your personal allowance starts to disappear at this level, so that on the portion of your earnings between £100,000 and £14,950 you are taxed an effective rate of 62%. This is even more than those earning £150,000 who fall into the 50p tax band.

Of course, it's hard for many people to feel too sorry for those on very high salaries. However, no-one likes to see more than half of what they earn disappear into the Chancellor's pockets. So a tax rate of 62% is sure to leave tears in the eyes.

The full picture
And while these rates are distressing, even they don't give the full picture. Once we have paid tax on our earnings, there are also the taxes we pay on everything we spend. Everything from fuel duty to VAT cuts us deep.

The Adam Smith Institute has worked out how long on average we have to work in order to pay all of these taxes, and it makes sobering reading:

• Income Tax 39 days
• National Insurance 26 days
• VAT 29 days
• Corporation Tax 12 days
• Fuel duties & petroleum revenue tax 7 days
• Local taxes (business and council tax) 13 days
• Capital gains / inheritance tax 2 days
• Duties on alcohol and tobacco 5 days
• All other taxes 17 days

So what do you think? Do these taxes come as a surprise? Are they fair? Let us know in the comments.

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