Reply to: Income Tax Rates the governmnet don't want you to know about....

[rawly]

True - I suppose it depends on the status of the employee as to whether it's a tax on them that they'd notice. An employee of IBM feels no effect of the Employer's NI, whereas a contractor under IR35 would as it reduces his pay.

I was in a situation, many years ago now, whereby a well known organisation (currently in the News alot about Freelancers!) had a 12 month Fixed term contract which was rated at £35,000. At the time I said to them it is rather low anyway, but I might be persuaded, but I'd rather do it via Ltd company than a fixed term employment contract with them.

So, if I'd taken the Fixed Term it would have all been treated as PAYE + NI, as I'd be on their payroll. Their HR said if I wanted it as Ltd company then that's fine. However, I then said if this was the case the Invoice level would need to be higher as they would be saving on Employees NI (amongst other things). So I'd expect them to pass that on into the Invoiced rate.

However, their HR would not budge on this and refused to add in the extra to be paid as Invoice!

So, I walked away from this in the end, as it wasn't worth it. I guess to sum up it's the merits of taking £35,000 pa as PAYE against £35,000 as a contractor, but without the added NI added, that the Client was saving, I didn't think it was worth pursuing this via the Invoice method, and neither did I pursue it via an employment contract.

Their HR simply didn't understand or was willing to accept that they would be paying me £35,000 as GROSS PLUS their NI contributions, which was infact a few thousand pounds. Plus I never even touched upon as part of the Fixed term I would have had holidays and sick pay also! All these things add up ontop of the basic Gross salary, which is then the total business cost of that resource.

So, you simply can't just translate an employees Gross Salary into a Contracting rate, it has to be the whole Cost to the end client of paying for that resource, and I find many HR departments are either ignorant or very stubborn on this issue. The direct Management of the department understood, but HR departments are as law to themselves!

[helen7]

Don't forget to add the 20% VAT you have to pay on anything that you purchase.

[BlasterBates]

Unfortunately the government spends a lt so if all these permies got a tax break, the country would go bankrupt. Be thankful that as a contractor you can avoid at least some of it. Comparing with other countries, including Switzerland and Luxembourg it isn´t bad at all. If the tax were low you would probably find everything would become incredibly expensive, lets face it for example the NHS is free. On the whole the higher the tax the cheaper everything is, just something I generally see going into different countries. There seems to be a general law of "take home pay" giving you the same purchasing power of disposable income regardless of where you are.

[farout117]

Guess you people have never worked in Belgium under an SPRL! That's were the confusion is, 60% tax!

Can't wait to get out of this tulip hole

[Ignis Fatuus]

True - I suppose it depends on the status of the employee as to whether it's a tax on them that they'd notice. An employee of IBM feels no effect of the Employer's NI, whereas a contractor under IR35 would as it reduces his pay.

I.e. for most people it's not only an income tax, it's a stealth income tax in that they don't see it. That's why it's so hard for governments to create a Unified Income Tax including both NICs - people would see for the first time how much income tax they're really paying.

Which I think was the OP's point.

[IR35FanClub]

No - it is 13.8% of the gross that the employee sees.

The supergross is the total amount that the employer is effectively paying. For a contractor operating IR35, the supergross is the 95% that has to be put through PAYE. Employers NI is 12.12% of that, then income tax / employers NI is based on what's left.

Virtually all large employers budget salary using the supergross figures. Employers NI is effectively part of the employee's salary as far as they are concerned, just with 12.12% chopped off before the employer gets to see it.

So if you want to calculate the total tax percentage (including employers NI), then the divisor should be the supergross value.

What I don't understand is why isnt there a bg deal going on about this in the newspapers? I mean seriously it's a great campign starter with headlines like "Employment Tax now reached 65% for middle earners" and Taxman takes 25% of your salary without you even knowing".

[centurian]

Your saying that the 13.8% rate is actually based on some "supergross" figure that is the employees salary they see as gross with an uplift added that is the reverse of taking off 13.8%?

No - it is 13.8% of the gross that the employee sees.

The supergross is the total amount that the employer is effectively paying. For a contractor operating IR35, the supergross is the 95% that has to be put through PAYE. Employers NI is 12.12% of that, then income tax / employers NI is based on what's left.

Virtually all large employers budget salary using the supergross figures. Employers NI is effectively part of the employee's salary as far as they are concerned, just with 12.12% chopped off before the employer gets to see it.

So if you want to calculate the total tax percentage (including employers NI), then the divisor should be the supergross value.

[Clare@InTouch]

Ouch, now my head hurts. Your saying that the 13.8% rate is actually based on some "supergross" figure that is the employees salary they see as gross with an uplift added that is the reverse of taking off 13.8%?

Thats gonna make my spreadsheet start smoking again. It gave up last year coz of the duty rise!

Say you get a salary of £20,000. You pay tax and NI on that £20,000 at any amount over the tax/NI free limits.

The Employer pays 13.8% on the £20,000 that's above the NI free limit.

[IR35FanClub]

There is an error in your figures in respect of Employers NI.

Employers NI comes off first, and then employee's NI and income tax is applied to what is left. This slightly reduces the overall percentage amounts of employee's NI and income tax when compared to the full starting amount.

Secondly, Employers NI is not a percentage of the full gross, but a percentage applied to the employee's gross.

If you start from the full gross, the 13.8% of employers NI is effectively 12.12% of this amount.

However, it's still a lot of bloody tax.

Ouch, now my head hurts. Your saying that the 13.8% rate is actually based on some "supergross" figure that is the employees salary they see as gross with an uplift added that is the reverse of taking off 13.8%?

Thats gonna make my spreadsheet start smoking again. It gave up last year coz of the duty rise!

[IR35FanClub]

With respect, I know this is an old argument, but Employer's NICs are paid out of the payroll bill, so IMHO it matters little which party has the duty of handing it over to HMRC - it's still an income tax.

I disagree it matters little.. you HR / Payroll person doesnt really care what the number is, they work it out and hand it over.

The MD probably cares as it comes off his bottom line, but he's only got one vote.

Now imagine if you said to the employees.. that could be your money that, but the gov have it instead.

And lets not forget NI is basically a tax so the £8000 we get tax free isnt tax free. NI employers starts before this. Its all b-lox and we should be getting a payslip that shows how much of our potential hard earned goes to the exchequer.

[IR35FanClub]

I'm trying really hard to understand the point you're trying to make... maybe i've had too many beers tonight. Will try again in the morning

LOL, really im saying that if most people in permie land knew what they were losing of THEIR potential earnings, there would be mass protest. Its only working as a contractor where you can see what you would lose from invoice value through to money in your pockets that makes you wake up and realised what is worng with the system. Theres no way any government can justify taking more of the money you earn than you get yourself.

I am suppoort of the taxpayers alliance proposal to abandon NI and tax everything under PAYE. The gov need to stop dicking about with rates and thresholds and just say we need to raise X billion so you all get £10k tax free and then any income from any source after that is taxed at something like 30-40%. In real % terms if the rate was 40%, the effect of the tax free allowance is that you would be paying 30% on 40k gross, 35% on 80k gross and 36% on 100k gross. Ie you could work out from your gross salary what you would be earning this year, rather than needeing a spreadhsheet and a couple of websites to work it out!

That is a fair system. It doesnt matter whether your income is from a job, a ltd company you own shares in, or selling an oil painting, its income and its taxed. It probably needs more work to define what is income, but makes it much simple than the silly bands and threshold the gov keep deceitfully playing with. Last year they said they were keeping tax the same. Yet dropped the 40% threshold and lowered the NI threshold. If that isnt lying about tax then I am a monk.

[Clare@InTouch]

With respect, I know this is an old argument, but Employer's NICs are paid out of the payroll bill, so IMHO it matters little which party has the duty of handing it over to HMRC - it's still an income tax.

True - I suppose it depends on the status of the employee as to whether it's a tax on them that they'd notice. An employee of IBM feels no effect of the Employer's NI, whereas a contractor under IR35 would as it reduces his pay.

[Ignis Fatuus]

Centurian is right about the Employers' NI - it's paid by the Employer, not by you, and it's applied to the gross. So your end total tax figures are all 13.8% too high.

With respect, I know this is an old argument, but Employer's NICs are paid out of the payroll bill, so IMHO it matters little which party has the duty of handing it over to HMRC - it's still an income tax.

[Clare@InTouch]

You also lose your personal allowance when you go over £100,000, which bumps it up a bit (60% marginal rate for a slice of income).

Centurian is right about the Employers' NI - it's paid by the Employer, not by you, and it's applied to the gross. So your end total tax figures are all 13.8% too high.

You're also only looking at PAYE - you'd get slightly different results if you looked at the usual contractor position of small salary, CT and dividends.

[centurian]

There is an error in your figures in respect of Employers NI.

Employers NI comes off first, and then employee's NI and income tax is applied to what is left. This slightly reduces the overall percentage amounts of employee's NI and income tax when compared to the full starting amount.

Secondly, Employers NI is not a percentage of the full gross, but a percentage applied to the employee's gross.

If you start from the full gross, the 13.8% of employers NI is effectively 12.12% of this amount.

However, it's still a lot of bloody tax.