Family tax rates ‘need addressing’

tax rates

tax ratesThe co-author of an annual review of family tax rates has called for a rethink of the current income tax system, arguing it should be redesigned to help people like us save money.

Working with the charity CARE, Don Draper writes in the Telegraph it isn't fair that the system of independent taxation treats taxpayers with family responsibilities in the same way as those without.

Although we pay the same amount of income tax, families are currently worse off than their single-living counterparts.

He states: "How well-off people are does not just depend on income. It depends also on the size of the family".

Talking figures

For instance, a couple with two children on £35,000 will actually be placed in the poorest 40% of the population, whereas the single person on £35,000 will be in the top 20%.

Mr Draper also pointed out that around one in four families with an income below £40,000 could have marginal tax rates of 73% or more.

This is made up of:

  • 20% from income tax
  • 12% from national insurance contributions
  • 41% from cut tax credits if you work overtime or receive a pay rise

He predicts this marginal rate could rise even more next year for some households when Universal Credit starts to replace tax credits.

When this happens, families will keep less than 24p from every extra pound earned.

Redesigning the system to better cater for families would help solve this problem, resulting in less people needing tax credits to support their income.

How much tax should you be paying?

Tax rates aren't the easiest subject to get your head around, but understanding it is important in figuring out just how much you should be paying, keeping and saving. After all, you could be paying too much.

Simply think of it as the layers of a cake.

The first layer of this is your personal allowance, equal to £8,105 - you don't have to pay any tax on this first part of your earnings, and the good news is that this allowance will be increased to £9,205 from April 2013!

The subsequent layer is the next £35,000 that you earn, on which you have to pay basic tax rate of 20%.

After this, the icing of your cake represents all earnings above £42,475 on which you pay 40% tax. Whereas, the top of your cake signifies earnings over £150,000, which attracts super tax, meaning you will be required to pay 50% tax.

A key thing to remember is to always check your tax code. This affects your pay and can be found on your pay slip.