Budget 2018 – Smoke and Mirrors

I don’t normally “do” politics on this blog, but claims in Budget 2018 have irritated.  Particularly the assertion that someone warning £50,000 “will be £860 a year better off from next April.”

An analysis of the numbers shows that this is not even an exaggeration, it is simply a lie!

For the purpose of this analysis, I have assumed a salary of £50,000 – simply as this aligns with the increased Higher rate threshold.

Income Tax

At first glance, the numbers stack up…

Income Tax Changes for 2019/20
Rate 2018/19 2019/20 Delta
Band Tax Band Tax
Nil Rate 0% £11,850 £0.00 £12,500 £0.00 £0.00
Basic Rate 20% £34,000 £6,900.00 £37,500 £7,500.00 £600.00
Higher Rate 40% £3,650 £1,460.00 £0 £0.00 -£1,460.00
Total £50,000 £8,360.00 £50,000 £7,500.00 -£860.00

National Insurance

But hidden in the small-print of the budget was the (expected) statement that the NI Upper Earnings Limit would increase in line with the Higher Rate threshold; the lower thresholds are also increased…

National Insurance Changes for 2019/20
Rate 2018/19 2019/20 Delta
Band Tax Band Tax
Below PT 0% £8,434 £0.00 £8,632 £0.00 £0.00
Below UEL 12% £37,916 £4,549.92 £41,368 £4,549.92 £414.24
Above UEL 2% £3,650 £73.00 £0 £0.00 -£73.00
Total £50,000 £4,622.92 £50,000 £4,964.16 £341.24

NEST Pension

The changes to the National Insurance thresholds also affect the NEST pension  contributions… while this is optional, it is opt-out, and probably not a bad idea…

Together the NI and NEST changes swallow up half of the claimed saving.

NEST Pension Changes for 2019/20
Rate 2018/19 2019/20 Delta
Band Tax Band Tax
Below LEL 0.0% £6,032 £0.00 £6,136 £0.00 £0.00
Below UEL 2.5% £40,318 £1,007.95 £43,864 £1,096.60 £88.65
Above UEL 0.0% £3,650 £0.00 £0 £0.00 £0
Total £50,000 £1,007.95 £50,000 £1,096.60 £88.65

The Sting In The Tale

Unannounced in this Budget, not even in the small print – because it relates to implementation of a long-announced change – is that for 2019/20 the contribution rate for NEST increases from 3% (2.5% nett) to 5% (4.17% nett).

NEST Pension Changes for 2019/20
Rate 2018/19 2019/20 Delta
Band Rate Tax Band Rate Tax
Below LEL £6,032 0.0% £0.00 £6,136 0.0% £0.00 £0.00
Below UEL £40,318 2.50% £1,007.95 £43,864 4.17% £1,827.67 £731.07
Above UEL £3,650 0.0% £0.00 £0 0.0% £0.00 £0
Total £50,000 £1,007.95 £50,000 £1,827.67 £731.07

Summary

In conclusion, while the headline Income Tax saving of £860 is welcomed, all other things being equal, workers earning £50,000 will be worse off by £212 a year.

Summary of Changes for 2019/20
Tax Delta
Income Tax -£860.00
National Insurance £341.24
NEST Pension £731.07
Total £212.31

Recommendations

Other than providing an opportunity for stealth taxes, now that the contributory basis of NI is no longer relevant, there is no justification for maintaining separate employment income tax and NI. Rather than raining the basic rate threshold, future budgets should raise the NI lower earnings limit to harmonise it with the tax threshold – at which point, employment income tax and NI should be merged (with their current combined rates of 0%, 32%, 42% and 47%).

Pensions, interest and dividend income can retain their existing rates.

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