Lone parent working 40 hours per week
(Tax Credit allowance: 1920 + 1950 + 790 + 545 + 2555 = £7,760)

 

At current minimum wage (£5.93 ph)

Gross annual pay 52 x 40 x £5.93 £12,334
Income tax (12334 - 7480) x 20% 971
Employee's NI (12334 - (139 x 52)) x 12% 613
Working tax credit 7760 - (12334 - 6420) x 41% 5,335
Net annual income (12334 - 971 - 613 + 5335) 16,086
Effective net hourly rate (16086 / (40 x 52)) £7.73
Employer's NI (12334 - (136 x 52)) x 13.8% £726
Total net tax (971 + 613 - 5335 + 726) -£3,025
Total cost to employer 12334 + 726 £13,061

 

At proposed living wage (£7.20 ph)

Gross annual pay 52 x 40 x £7.20 £14,976
Income tax (14976 - 7480) x 20% 1,499
Employee's NI (14976 - (139 x 52)) x 12% 930
Working tax credit 7760 - (14976 - 6420) x 41% 4,252
Net annual income (14976 - 1499 - 930 + 4252) 16,799
Effective net hourly rate (16799 / (40 x 52)) £8.08
Employer's NI (14976 - (136 x 52)) x 13.8% £1,091
Total net tax (1499 + 930 - 4252 + 1091) -£732
Total cost to employer 14976 + 1091 £16,067

 

Comparison

Net hourly increase ((16799 - 16086) / 16086) x 100 = +4.4% £0.34
Extra cost to employer ((16067 - 13061) / 13061) x 100 = +23% £3,006
Net additional tax take -732 - (-3025) £2,293
Overall marginal tax rate (Additional tax / Extra cost) x 100 76%

 

For clarity, rounded numbers are shown. Actual calculations are based on more precise figures, so some discrepancies may be apparent.

The figures in 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%.

At the current minimum wage (£5.93) the first 24 hours per week are virtually free of deductions. But every additional hour beyond the first 24 is taxed at 73%, giving a net remuneration of £1.60 per additional hour.

At a wage of £7.20 an hour, the first 20 hours would be free of tax. Every additional hour beyond the first 20 would be taxed at 73% to yield a net remuneration of £1.94 per additional hour.

If a student loan is due, all income over £15,000 would be subject to a further deduction of 9%. The marginal rate would then be: 20% + 12% + 41% + 9% = 82%.

Even at the Living Wage of £7.20, an hour of overtime worked by a person with a student loan to repay would amount to a mere £1.30 net. (Of course, whether one regards student loan repayments as a tax depends on one's view of education and whether it should be available to everyone.)

 

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