Basic rate of tax UK question

It's Wikipedia, but I'm still confused about something:  often I read here that it's 40% tax on income for most people.  But in this Wiki article:

The British income tax system is a progressive one with a number of bands: 10% (lower rate), 20% (basic rate for unearned income), 22% (basic rate on earnings from employment, a trade or profession), and (in respect of the higher rate band and trust income) 32.5% on UK dividends and 40% on other sources of income. There are also a number of untaxed allowances to which tax bands do not apply.

http://en.wikipedia.org/wiki/Income_tax

Seems like most people who earn money from employment would fall into the 22% band.  'other sources of income' sounds like something other than employment.

So, why do so many pay 40% income tax?

The 40% tax rate comes into effect for those that make over £32k a year. Meaning they are taxed at the basic rate of 22% and anything over £32k is taxed at 40%.

So, why do so many pay 40% income tax?

What do you mean by "so many"?

Remember that this board is not representative of the UK population, as

1) you have to be self-supporting in order to emigrate
2) there are people on HSMP visas (and their spouses/partners), meaning that they are in well-paying professions
3) there are people who have been transferred from jobs in the US(and their spouses/partners), meaning that they are considered indispensable, and are therefore well-paid



You could just as easily ask why there are so many people in the UK who are on benefits. (Even though there aren't very many people in that category on this board.)

The average full-time salary in the UK is about £23,000 a year, by the way.

Perhaps the reason you hear about 40% tax so often is that the ones who pay 40% tax are the ones who complain about taxes most?

The 40% tax rate comes into effect for those that make over £32k a year. Meaning they are taxed at the basic rate of 22% and anything over £32k is taxed at 40%.

Thanks.   It was confusing to me in the article, as the progressive nature of UK income tax wasn't made as clear.  Still 'income from other sources' seems different than describing bands of income and respective tax.

'Rip Off Britain' and other groups say Britain has one of the highest tax situations in Europe, and certainly higher than the US.  That's where I've read the assumed '40%' number as well.

'Rip Off Britain' and other groups say Britain has one of the highest tax situations in Europe, and certainly higher than the US. 

Curious how they get that information.

According to the UK trade and investment services website, these are the high personal tax brackets of some European countries (sourced to Ernst and Young, 2005)

France 59%
Sweden 56%
Belgium 53.5%
Netherland 52%
Italy 43%
Spain 45%
Germany 42%
Ireland 42%
Portugal 40%
UK 40% *
Hungary 38%
Czech Republic 32%

The US, of course, does not have universal health care, so it's not a valid comparison.

Chart is on page 9 of http://www.ukinvest.gov.uk/10235/en_GB/0.pdf.

Yes, completely agree that universal health care makes for apples and oranges comparison here.

This OECD 2005 chart shows lower tax rates than the chart you posted, using the respective country's average wage.  Wonder why?

http://en.wikipedia.org/wiki/Taxation_in_the_United_States

The OECD chart is based on average wage. The previous chart was based on highest income level.  A higher tax rate on the OECD chart could just mean that the average person in that country earns more money.

I checked the source site, http://moneycentral.msn.com/content/Taxes/P148855.asp, and it says that the data on the OECD chart is based on "the combined effects of personal income tax, employee and employer social security contributions, payroll taxes and cash benefits"

As the other website is directed at investors, there aren't going to be that many people of average or lower incomes looking at it, so they focused on the highest wages.

Just to observe that the UK 40% rate is wrong because the UK charges a compulsory 1% in National Insurance so the UK marginal rate on employmen income is always 41%.

The other rates quoted (eg France & Sweden) are also incorrect because they ignore social charges.  sweetpeach is right to note that such comparisons are often misleading for these kinds of reasons..

I've often looked at these sort of comparisons before.  They often do not reveal the full story, and much can be dependent upon individual circumstances.  For example, at first glance in that list above it appears that the upper Irish income tax rate is higher than the U.K., but if you happened to be a married couple with only one earning the money, you'd most likely be paying considerably less tax in Ireland due to the way the allowances are applied.   

As for the 40% U.K. rate, most people around this neck of the woods probably wish they could earn anything like the amount needed to get up to that tax band.   

Average full-time salary of £23,000 per year?   Not around here it isn't. 

And being one of those arseholes that earns enough to worry about 40%, I would say that my effective tax rate is very similar to what I was dealing with in the US.  I should have been finding more tax loopholes in the States, but I never was good at doing that and was getting taxed out the ying-yang.  I know when I ran my taxes every year, I was paying a lot more then most people.

The thing that probably makes the biggest difference to my spending power is VAT.  You tend to forget it is there and it makes things, especially with the current exchange rate, seem a lot more expensive then the States.

I know Sweden, Denmark and the Netherlands really have taxes in place to equalize people to a great extent.  If you want to talk about a lot of tax, those are the countries to be wary of!

If you want to talk about a lot of tax, those are the countries to be wary of!

I understand that at least one of those countries you mentioned has a standard VAT rate of 25%.   Ouch!   

Average full-time salary of £23,000 per year?   Not around here it isn't. 

Depends on where "around here" is.  According to latest available stats (2003-04) on Inland Revenue site those in London make 33% more than UK average.  You can look up your county on this link:

http://www.hmrc.gov.uk/stats/income_distribution/3_13_apr06.pdf

This site gives even more specifics, City of London avg income = 85,800 in 2003-04!

http://www.hmrc.gov.uk/stats/income_distribution/3_14_apr06.pdf

You can even find stats by gender, age, etc. on I/R site.  If you think you're a big earner, check out where you stand in this chart of percentiles:

http://www.hmrc.gov.uk/stats/income_distribution/table3-1.pdf

If you feel poor, don't feel bad because the avg income isn't a good comparison, look at the median instead.  Avg is biased upwards by the few who make tons of money, the median isn't because it is the midpoint of all salaries (half of population makes less, half makes more).  For 2003-04 the avg income was 21,900 while the median was 16,000.

Can you tell I'm a stats geek?

For 2003-04 the avg income was 21,900 while the median was 16,000.

That is shocking given the cost of living in the UK. 

Well, it isn't much less then the average in the States...

In the States it is $43318 which is £22218 at the current exchange rate.  Also the disparity of income in the States is much worse then in the UK.  One common measure of this is the Gini coefficient (http://en.wikipedia.org/wiki/Gini_coefficient).  In the UK its index is  36.8 and in the US it is 45, meaning that there is a greater distance between the "haves" and the "have nots" in the US then the UK.

Depends on where "around here" is. 

North Norfolk.

From your second link:

Self-employment income -  mean = 14,200, median = 8,340
Employed income - mean = 17,000, median =  14,000