Single 25-year old working 30 hours per week
(Working Tax Credit allowance: 1920 + 790 = £2,710)

 

At current minimum wage (£5.93 ph)

Gross annual pay 52 x 30 x £5.93 £9,251
Income tax (9251 - 7480) x 20% 354
Employee's NI (9251 - (139 x 52)) x 12% 243
Working tax credit 2710 - (9251 - 6420) x 41% 1,549
Net annual income (9251 - 354 - 243 + 1549) 10,203
Effective net hourly rate (10203 / (30 x 52)) £6.54
Employer's NI (9251 - (136 x 52)) x 13.8% £301
Total net tax (354 + 243 - 1549 + 301) -£652
Total cost to employer 9251 + 301 £9,552

 

At proposed Living Wage (£7.20 ph)

Gross annual pay 52 x 30 x £7.20 £11,232
Income tax (11232 - 7480) x 20% 750
Employee's NI (11232 - (139 x 52)) x 12% 480
Working tax credit 2710 - (11232 - 6420) x 41% 737
Net annual income (11232 - 750 - 480 + 737) 10,738
Effective net hourly rate (10739 / (30 x 52)) £6.88
Employer's NI (11232 - (136 x 52)) x 13.8% £574
Total net tax (750 + 480 - 737 + 574) £1,068
Total cost to employer 11232 + 574 £11,806

 

Comparison

Net hourly increase 6.88 - 6.54 = 0.34 +5.2%
Cost to employer 11806 - 9552 = 2255 +24%
Net additional tax take -652 - 1068 +£1,720
Marginal tax rate 1720 / 2255 x 100 76.3%

 

For clarity, rounded numbers are shown. Actual calculations are based on precise figures, hence some discrepancies may be apparent in these figures.

The tables above take into account the 13.8% Secondary Class I National Insurance contributions paid by employers. If we disregard that tax, the marginal rate applied directly to the gross wage is 73%.

 

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