Punitive marginal tax rates can be mitigated with a little planning.
Take, for example, the case of someone earning £50,000 – the level at which child benefit begins to be withdrawn. This benefit pays £1,133 per year for a first child, £751 per additional child.
You will receive no child benefit at all if the highest earner in the household has a gross wage of £60,000.
In this case, if you have three children, that means a marginal tax rate of 68 per cent on income between £50,000 and £60,000. You could try working more hours and earn another £5,000 a year to make up for the extra tax you paid. But you’re only left with £1,600 after tax (and working overtime isn’t an option, of course).
Instead, you could use an employer’s ‘salary sacrifice’ scheme and put the £5,000 into your pension pot. You would then pay no income tax or social insurance on the £5,000 – while your employer would pay no employer’s insurance, saving him £690 – 13.8 per cent of £5,000. If your employer is generous, they can put the £690 they saved in tax into your pension pot. So instead of only having $1,600 left, you’re left with $5,690.
It may seem like a win-win situation, but the downside is that you won’t have access to this money until you retire. Dan Neidle, of Tax Policy Associates, says: ‘A lot of people would think it’s a good deal, but it’s a stupid result. You are forced to make a sub-optimal choice.’