WTF?! How much tax do we actually pay?

Sounds simple enough, right? Well… if it were then I would be out of a job…

If you’re as cool as me and want to experiment, go ask your friends and family - 

“Hey, you there, Uncle Gaz – how much tax do you pay % wise?”

Now, if they are in that basic-rate band (below £50K or so) they will say:

“20% mate, love it, a very low and reasonable rate”

Then you ask your reasonably wealthy auntie who has two holidays a year, shops in M&S (you know the kind!)

“Hey, auntie, how much % tax do you pay?”

The reply is usually a bit more abusive and direct, a bit like a 'Donald Trump Truth' social post at 2am with lots of CAPITAL LETTERS... but it is something like this:

“Bloody 40%, can’t believe people only pay 20% - the cheek, the nerve!”

OK, so hopefully I have painted the picture of a perfectly normal chat here, and I want to address how actually these two people are completely wrong! And infact, the tax system is made like this so people continue to think this way - let’s get to it!

The numbers for Gaz

So, Gaz is on the average salary in the UK (for all you boffins out there we are using the median £38K, not the mean average (£43K) or the more realistic average of mode (£27.5K) – and the only reason is, the numbers are just not as interesting!)

So £38K.

We have the following:

Employer National Insurance Class 1 Secondary - £4,000 - 10.5% effective rate

PAYE/Income Tax - £4,286 - 11.3%

Employee National Insurance Class 1 Primary - £1,714 - 4.5%

Employee Pension - £1,150 – 3%

Employer Pension - £700 – 1.8%

Total - £11,614 tax (or 30.6%)

The numbers for M&S Auntie

So, M&S auntie (mainly because I could not think of a Woman’s name to play off my playful man’s version Gaz – I digress), she earns £100k.

So, her figures look like this:

Employer National Insurance Class 1 Secondary - £12,550 – 12.6% effective rate

PAYE/Income Tax - £22,412 – 22.4%

Employee National insurance Class 1 Primary - £3,760 – 3.8%

Employee Pension - £3,750– 3.8%

Employer Pension - £2,250 – 2.3%%

Total - £43.6k tax (or 43.6%)

Why employERs contributions, Lloyd? - Have you lost your number-crunching mind?

Well no, as 60% - 70% of all employees in the UK work for SMEs, and SMEs do not have the luxury of having endless amounts of cash where they can absorb the cost of employer contributions.

Followed by the fact they are unable to increase their prices easily to consumers. Amazon as an example, however, can pretty much dictate their prices. (I've got no issues with Amazon… well, I do, but that’s not the point!)

For everyone that is a little unsure here, employERs (as in the boss) also must pay taxes on employEE’s - which is actually pretty mental when you think about it. With youth unemployment rising, they jack these %s up - and then blame the younger ones and call them snowflakes. When it might, just might, have something to do with the increase in tax on employing people. But what would I know…

Why pension contributions, Lloyd?

Well since auto-enrolment, you basically don’t have a choice. You can “opt out” to only be re-enrolled back in 3 years later, and unless you really are an admin God and keep opting out on time (which if you don’t is a processing nightmare) you will forever pay your pension contributions to keep the UK’s pension Ponzi scheme alive.

I also left it in to show that after around £50K, your pension contributions for auto-enrollment actually stop and so someone on £50K or £500K pay the same pension amounts (auto-enrolment only, mind)

So, what are you getting at?

Most people actually pay 30% tax effective and everyone else pays around 40%. This whole divide of "I pay more" is actually a lot closer than it appears. Even after removing my pension and employer contributions you still get a difference of the Auntie paying 25% and Gaz paying 15% - again around 10% difference.

So, when your next looking real cool and chatting about the taxation system, give a thought that actually no matter if your paid £38K or £100K you are paying very similar amounts of tax.

What about Rupert?

Ahh yes, I forgot good old Grandad Rupert. He did quite well in his long life. He is around 70 years of age, saved up, took advantage of the growing house prices in the 90s, had a few kids, saved well in his 9-5 job at the office selling paper. He built up quite a little pot of income.

He currently has this stashed away in a Trust, ensuring that generations to come can keep this wealth without that pesky Inheritance Tax. He has even purchased a gravestone in Guernsey and Cayman just to be sure.

He puts his £5m in an offshore Trust, purchases offshore bonds that pays a minuscule 5% (£250K) of initial capital tax deferred each year. And in his retirement he went away for 5 years, claimed non-resident on his boat (he may have settled in Guernsey - you never know!) around the world and declares a huge trust dividend tax-free as he was not a tax resident in the UK.

"But what happens when he runs out of that money?" I hear you ask...

He rings the bank and loans against the trust, as a loan is not 'income'.

No income. No tax.

Lloyd

The Finance Guy