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teddyboy

Wage Inflation - Could Be A Bad Thing?

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Anyone know what the threshold is for 40% tax?

It's just occurred to me that if I was earning £28K @ 26% (tax & Insurance) I would get £20,720 NETT.

Yet if I was on £35K and was taxed 40% (tax & Insurance) I would get £21,000 NETT

On borrowing at 3.5 x wage the GUY on £28K would get to borrow £98,000

The Guy on £35K could borrow £122,500 but only gets £280 extra to service an extra £24,500 worth of debt.

Therefore the guy on £28K has a better affordability than the guy on £35K. So we are saying we need to wait for affordability to come back through wage inflation. If you are on the brink of the 40% threshold and you just went over it - you are actually WORSE OFF!!

Does the threshold move up with inflation?

TB

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You only get charged 40% above the threshold so on your figures if the threshold is 34k then you would be taxed

34000 x 25% = 8500

1000 x 40% = 400

so the total tax bill is 8900

post tax income is 35000 - 8900 = 26100

This is very simplified but I think it is ok.

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Therefore the guy on £28K has a better affordability than the guy on £35K. So we are saying we need to wait for affordability to come back through wage inflation. If you are on the brink of the 40% threshold and you just went over it - you are actually WORSE OFF!!

Does the threshold move up with inflation?

No, it lags behind, welcome to the wonderful world of 'fiscal drag', the number of higher rate tax payers has increased from just under 2m when Labour came into power to over 3.6m today, increasing by nearly 200k each year. And those 3.6m pay over 60% of overall private tax revenue.

This will be a real issue soon when the threshold hits a cliff effect in many sectors, it's already becoming the case in London where the average full time salary in most sectors is pushing through the 40% threshold (I know there are various measures of this).

Ironically because public sector wage settlements have been running far in excess of private sector or RPI-X settlements many have been caught in this net, civil servants of even moderate rank are getting hit by the higher threshold, but in a sense if it's essentially 'unearned' and Gordon Brown is a god they have to grapple this dubious moral dilemma. Maybe we could have a dual tax system for private and public sector, there is already a de facto separation when it comes to other things like pensions and other benefits so why not make it formal and abolish income taxes for the public sector since they're essentially just recycling public money with tons of administration in the process :D

Anyway, people have been advocating flat tax recently, as I've said before we will have flat tax in this country before long, everyone will pay 40%!

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Don't forget, any savings you have add up over time and you get charged tax on them seen as part of salary. So, for example, if you earn 35K per year or thereabouts and are just under the 40% tax band the interest from your savings pushes you over the threshold and you then get taxed at 40% on that. This is a problem with those who are saving for years to buy.

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Don't forget, any savings you have add up over time and you get charged tax on them seen as part of salary. So, for example, if you earn 35K per year or thereabouts and are just under the 40% tax band the interest from your savings pushes you over the threshold and you then get taxed at 40% on that. This is a problem with those who are saving for years to buy.

Indeed, that aspect certainly isn't progressive, maybe people think this is offset with greater relief on pensions? Though the end result is the same as being topped up at 22% when you think about it.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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