Why marginal rates matter14 November 2011
A few weeks ago, I attended Bristol's Libertarian Society, which hosted a debate on Freedom vs. Equality. One of the speakers was the union president, who used an example of (if I remember the name correctly) Danielle as someone who survived on minimum wage in south London and "travelled by bus because they could not afford the tube". Aside from the relative affordability of the tube being due to greedy unions, the debate declined into a somewhat irrelevant argument over the minimum wage. In reality it ain't the minimum wage of office cleaners that are killing SME, and it certainly is not the minimum wage that is keeping graduates out of work.
Calculating the damageGiven how horrendously complex National Insurance is, it is hardly surprising so many people are due debates. Rather than attempting to calculate it myself, I use a nice calculator provided by Listen-To-The-Taxman. OK, the values it gives don't quite match up to my pay-cheque, but the difference is tiny compared to what I would need in shock recovery from calculating it myself. For demonstration purposes I put in the £16,000 gross salary above which student loan repayments commence, and compared the nett salary calculated with that of £17,000. The difference is how much of a 1,000 pay rise you actually get to keep, and it works out as £590. Using other combinations typical of graduate salaries such as £20,000/£21,000 and £25,000/£26,000 will yield the same value. Paying £410 out of your extra £1,000 is a marginal tax rate of 41%.
Why this stingsI was calculating the salary increase that would be needed to offset the higher living costs of moving to the Chiswick area. I had assumed £800 per month (a conservative estimate, if anything), and it then dawned on me that the already high £9,600 extra would actually have to be £16,271.
And it gets worse. Employer National Insurance contributions have been increased to circa 11%, which means that on top of the £1,000 gross salary increase, they have to fork out an extra £138. So your extra £590 actually costs them £1,138. Put another way you being £1 better off costs £1.93. When I calculated it last year, it was a mere £1.88. And one wonders why graduate unemployment is so high..