Faced with a Gaseous Anomaly, or the unexpected appearance of an Interspatial Rift, Mr Spock would often advise that he had insufficient data on which to draw any conclusions, prompting Captain Kirk to ask him to speculate. Mr Spock would then lift one eyebrow before invariably explaining exactly what was going on.
So it might be interesting to get Mr Spock’s views on the logic behind the charges, taxes and contributions that beset UK payroll. A progressive system in that some pay more than others, but with only a casual relationship between higher earners and higher rates. This is why, for example, a taxpayer in England earning £126,000 pays less tax on the next £1 earned than someone living in Glasgow on £45,000.
Let’s sit Mr Spock down and attempt to explain.
The first thing to do is think in terms of the NET and the GROSS. The former is what the employee actually gets to keep and the difference between them is all the stuff the Government mandates is also paid. On top of this, the employer receives tax relief for every penny they pay the employee (except certain expenses, like staff entertaining, but even there we find exceptions) if they are making a profit, at 19% for corporations.
As an example, let’s say the advertised salary is £40,000, and the taxpayer lives in England. For each extra £1 earned (up to £50,270 where there is a rate change) the charges are as follows:
Income tax 20p
National insurance 13.25p (from 6 April)
Pension contribution (“auto-enrolment”) (say) 5p
To be clear the pension contribution is for the employee’s benefit, and they can opt-out. Also many employees will see it as a salary sacrifice, so a reduction rather than a deduction from pay.
(Mr Spock raises one eyebrow laconically, and looks like he’s about the say something, but then lowers it and closes his eyes).
The employee gets 61.75p, and payroll then pays over each of the other amounts to the Government and the pension provider.
But it doesn’t end there because there are employer charges also to be paid, not deducted from the employee, but still based on that £1:
Employer’s NIC 15.05p (from 6 April)
Employer’s pension contribution (say) 3p
Apprenticeship levy 0.5p (applies to businesses with an annual pay “bill” exceeding £3m)
It should be noted that employer’s class 1 NIC is reduced by £5,000 (up from 4,000) annually if your total contributions were less than £100,000 in the previous tax year.
So the £1 has led to deductions, contributions, and charges totalling 56.8p and a net payment to the employee of 61.75p, which means £1 actually cost the employer £1.1855. Except it didn’t because, if the employer pays tax, it gets a deduction, let’s say at 19% (the current corporation tax rate), which is 22.52p. So the true net cost of paying the employee just under 62p is “only” 96.03p.
(Mr Spock has stood up and is pacing around the room now. He knocks a 3D chess piece from his Vulcan Chessboard and it clatters unnoticed across the floor.)
The tax and NIC rates vary depending on how much you earn. IN addition, if you’re lucky enough to get to £100k per annum your personal allowance is removed at the rate of 50p for every extra £1 you earn until it’s all gone (at £125k). This means the tax rate is 20% from 12,570 to 50,270, 40% from 50,271 to 100,000, 60% from 100,001 to £125,140, then back DOWN to 40% (Mr Spock just made a funny noise) and then UP to 45% from £150,000.
The employee NIC rate also changes at £50,270, so that keeps things simpler (for people who don’t live in Scotland). Below £50,270 you pay NIC at 13.25% and above its 3.25% (yes it goes down). The employer also pays NIC at a flat rate of 15.05%, regardless of earnings. However, employee NIC isn’t paid on benefits in kind like cars or interest-free loans, but employer NIC is.
If you live in Scotland it gets more difficult as the tax rates are different (mostly higher), but the NIC rates are not. This means, for example, that someone earning £45,000 in Newcastle pays a combined tax and employee NIC rate of 33.25% whilst the same person in Glasgow pays 54.25% on each extra £1. Mr Spock frowns and, and asks if “progressive means something else in the Human Scottish dialect ”?
(OK, we’re getting worried about Mr Spock now. He’s still making a funny noise, that might be giggling, and that’s not right for a Vulcan. There was that episode in the original show when he went a bit crazy, and lots of people in red shirts took a battering. Not cool)
This year’s NIC rate increase was roundly reported as being “just 1.25%”. But it applied to both employer and employee so increased HMRC’s “cut” by 2.5p in the £1 (including Class 1A, Class 1B and Class 4). However, this increase is offset by the business tax relief which will reduce it. The Government also increased the dividend tax rate by 1.25%, to ensure that directors taking dividends out of their business were caught.
From next April, NIC will go back to where it was but the extra 1.25%s will stay and will become the new “Social Care Levy”. As we speak payroll managers are being asked to put arguably political statements in payslips heralding this new charge to pay for things that arguably NIC was originally introduced to pay for.
“Why” asks Mr Spock, a single tear glistening in his eye in a very worrying and frankly not very Vulcan Science Academy way, “is this so complicated?”. Well the answer has, in the author’s very personal view, a lot to do with the way Chancellors need to have things to announce…
At this point I regret to report that Mr Spock had beamed away. His final words were “Frankly this is just illogical, the needs of politics seems to outweigh the needs of the many or even the few”.