Tax too Complex for Many

/ 27 May 2014

More than a quarter of young adults in work have no idea how much tax they have to pay, according to research by ICAEW.

The poll marks this year’s tax freedom day – the day employees start to see their annual earnings go into their own pockets rather than government coffers. The study found 28% of 18 to 24 year-olds did not understand what they pay in tax and national insurance while across all age groups, 16% of workers polled did not know what rate of tax they have to pay.

Source: Independent i

We Say: Most people know that there is a basic rate of tax is 20%, a higher rate of 40% and – somewhere off in the stratosphere inhabited only by the super-rich – a rate of tax which jolly well ought to be 50% but which that Osborne man reduced to 45% for the benefit of his Eton chums (we do read the tabloids, you know). Beyond that it gets a bit hazy for a chap. 

There’s a 10% rate on dividends (but covered by a tax credit of that amount). It’s 32.5% or 37.5% tax on dividends for higher-rate payers (which nets down to an effective 25% or 30.55% by the time you’ve taken the tax credit into account). Then there’s the effective 60% rate for income between £100,000 and £120,000. And there’s National Insurance – a tax in all but name – which you start paying at a lower point than that at which you start to tax. Not forgetting the tax on Child Benefit (not called a tax, of course, but the “High Income Recovery Charge”) the rate of which depends entirely on the number of children for which you (or your spouse or partner)are claiming benefit – a rate of 11% if you have one child and 25% if you have three. So, as your earnings rise, our so-called “progressive rates” of tax (including NIC and HIRC) rise from 0% to 47% – but do so via rates of perhaps 12%, 32%, 42%, 67% and 62% (in that order). 

The only astonishing thing in the ICAEW’s survey is the startling assertion that 84% of workers claim to know what rate of tax they have to pay. We bet they don’t. 

For more information, please contact London Accountants Berg Kaprow Lewis.