If it looks like tax, smells like tax and tastes like…….

You’d think the fact that something looks like tax, smells like tax and tastes of one hundred percent taxation would give the game away.

Recent events suggest not.

You see it all began in public house when discussions moved towards income tax. Yes, the conversation must have been on its last legs. (I think we were clutching at straws by this point).

Nevertheless a key question was raised. What is the average income tax rate most pay in the UK?

Without hesitation, ’20%’ was put forward and I for one wasn’t about to argue. Nobody else did either.

(After all I was pretty sure UK average incomes were hovering in the mid thirties and that 20% was the basic rate of income tax).

You loser

Not being a total loser, weeks passed before I thought about this again. But when it did come back on the agenda it did so with a bang.

You see I was reading how great the UK pension system is. You know now that we are forced to pay into one and more importantly that our employers are forced to contribute too. The words ‘free money’ were banded about more than once.

Now, maybe its age, or maybe its one too many knocks in the hard school of life, but free money? That doesn’t sound right does it?

So I got to thinking about this and it didn’t take long to realise things might not be what they seem. Let me explain.

What is income tax?

Let me begin by asking a simple question. What is income tax?

Here’s my answer:

Income Tax is a tax on earnings

If that sounds about right to you. How about another question? What is National Insurance?

When I thought about this one, my definition was too similar to the one I came up with for income tax so I thought I’d try another source.

Here’s what Moneyhelper say.

National Insurance is a tax on earnings

That’s interesting, for two reasons.

First, because that is more or less what I came up with (it is the same as income tax).

And second because that’s a government backed website.

So can we say the Government are basically saying National Insurance is income tax.

If it looks like tax….

And when you think about it, that description is perfect.

In other words, those National Insurance Contributions or NICs are just income tax under another name.

Let’s face it. That is money taken out of your salary by the government who then uses it to pay for stuff.

This is true of National Insurance and it is true of income tax. They are effectively the same.

And once you figure that out, you can’t help but be a little suspicious about that 20% number that kick started all this.

National Insurance 101

Now the odd smart aleck will claim that they already know National Insurance is a tax and that it is just like income tax etc etc.

Fair enough. But here’s the thing. If that’s you, you are in the minority. Most people don’t. Or at least most of the people I asked don’t. They think its something special because it helps to provide our free NHS and State Pension.

So a couple of things on that right off the bat.

• A. There’s no free NHS. We pay for it. Big time.
• B. Keep this idea of State Pension in your mind. We’ll be coming back to it shortly.

But here’s the bit most people miss.

Did you know there’s another National Insurance out there? It’s called employers National Insurance and it needs paying for each and every employee.

Now, on the face of it, that’s no big deal because it’s the employer’s responsibility.

That is, until you stop and think about that for a moment.

Because when you do, and clarity prevails you realise where that money is coming from. Have you guessed yet?

Muggins

Muggins pays it.

It comes right out the money allocated to your job. In other words, that’s money you’d pocket if your employer didn’t have to pay it to the government. And in other words, you pay it.

Now, it’s worth stopping to think about that for a moment. What this really means is you pay National Insurance twice.

And as we’ve already established, when all said and done, National Insurance is just income tax anyway.

And if that is the case doesn’t that mean that we are paying income tax three times? I think it does.

In fact I think a lot more of our income disappears in tax than most realise.

We might be on a role now.

When is a pension not a pension?

If you’ve got this far, hopefully you understand that your income tax can be split into three and that two of the three are National Insurance.

So it’s worth having a think about what those NICs are paying for.

I went to five sources and each one listed a range of benefits all starting with the State Pension.

And that makes sense. I feel like that’s the big one too.

So I suppose its worth paying for through our National Insurance contributions and then again from employers National Insurance (You know that money that we’d get otherwise).

Sure, it won’t make us rich, but paying twice for the State Pension will help us get through our old age without starving.

And anyway, it doesn’t matter because we’ll have our employer pension scheme to fall back on.

Say what!

You know the one that comes out of our salary with free money from our employers. Wait a minute. Is it just me or is this starting to sound a bit suspicious.

We are paying for our pension through National Insurance contributions (twice) only to have to pay for another pension (twice).

You read that right.

We pay for our employer pension twice x two = four times.

There’s no way your employer is giving you free money. They are giving you money that was allocated to your role. That pension contribution from your employer is coming right out of the salary you would have had just like that employer National Insurance malarky.

Don’t get me wrong. I’m not saying pensions aren’t important or that we shouldn’t contribute, but I am saying we shouldn’t contribute on four separate occasions each and every month for the same thing.

Whether or not those four pension contributions can all be called taxes is up for debate, what’s not up for debate is some of them have to be.

Tax controversy

Now this next one is a bit controversial but hey. There’s a strong argument that University education should be free and that the fact it isn’t suggests it nothing more than a tax in disguise.

And hey, its sure looks like tax from where I’m sitting.

Here are some pretty strong reasons to back that up:

• If it’s not free, then rich people are at a serious advantage. Their parents can pay the fees without even thinking about it. Less well off families simply can’t do that.
• The people that introduced the legislation didn’t pay for their fees because it used to be free throughout the UK.
• Other countries manage it (see list below).
• That list of other countries contains Scotland.

Here’s the list:

Argentina
Austria
Belgium
Greece
Czech Republic
Denmark
Finland
France
Germany
Iceland
Malaysia
Norway
**S C O T L A N D**
Spain
Sweden
Turkey

Whether you agree or not, the fact of the matter is, most students have to pay back a large loan averaging £45K with interest.

That money comes out of your income just like income tax. Not to mention those two pension contributions and the two National Insurance Contributions (which also contain pension contributions!).

You may not agree, but I think there’s a strong argument that each an every one of these are income taxes by other names.

Impact of ‘not’ taxes on your income

If you don’t totally disagree with all that then the logical next question becomes how do these ‘not’ taxes impact our payslips.

The table below shows what happens to incomes of different levels when you include all these ‘not’ taxes.

How much you are really left with after tax and ‘not’ tax

Salary	Income Tax	National Insurance	Employers NI	What your total pay was really	Pension contributions	Student loan repayments (£45K debt av)	How much you got	How much you really paid in tax	Effective tax rate
£10,000	£0	£0	£125	£10,125	£800	£0	£9,200	£925	9%
£20,000	£1,486	£845	£1,504	£21,504	£1,600	£0	£16,069	£5,436	25%
£30,000	£3,486	£2,004	£2,884	£32,884	£2,400	£243	£21,867	£11,018	34%
£40,000	£5,486	£3,154	£4,264	£44,264	£3,200	£1,143	£27,017	£17,248	39%
£50,000	£7,486	£4,304	£5,644	£55,644	£4,000	£2,043	£32,167	£23,478	42%
£60,000	£11,432	£4,530	£7,024	£67,024	£4,800	£2,943	£36,295	£30,729	46%
£70,000	£15,432	£4,730	£8,404	£78,404	£5,600	£3,843	£40,395	£38,009	48%
£80,000	£19,432	£4,930	£9,784	£89,784	£6,400	£4,743	£44,495	£45,289	50%
£90,000	£23,432	£5,130	£11,164	£101,164	£7,200	£5,643	£48,595	£52,569	52%
£100,000	£27,432	£5,330	£12,544	£112,544	£8,000	£6,543	£52,695	£59,849	53%
£110,000	£33,532	£5,530	£13,924	£123,924	£8,800	£7,443	£54,695	£69,229	56%
£120,000	£39,432	£5,730	£15,304	£135,304	£9,600	£8,343	£56,895	£78,409	58%
£130,000	£44,703	£5,930	£16,684	£146,684	£10,400	£9,243	£59,724	£86,960	59%
£140,000	£49,203	£6,130	£18,064	£158,064	£11,200	£10,143	£63,324	£94,740	60%
£150,000	£53,703	£6,330	£19,444	£169,444	£12,000	£11,043	£66,924	£102,520	61%
£200,000	£76,203	£7,330	£26,344	£226,344	£16,000	£15,543	£84,924	£141,420	62%
£400,000	£166,203	£11,330	£53,944	£453,944	£32,000	£33,543	£156,924	£297,020	65%
£600,000	£256,203	£15,330	£81,544	£681,544	£48,000	£48,420	£232,047	£449,497	66%

There’s a lot of information on there. It should be pretty self explanatory but in case you are short on time I’ve summarised the important bits below.

Salaries vs effective tax rates

Salary	Effective tax rate
£10,000	9%
£20,000	25%
£30,000	34%
£40,000	39%
£50,000	42%
£60,000	46%
£70,000	48%
£80,000	50%
£90,000	52%
£100,000	53%
£110,000	56%
£120,000	58%
£130,000	59%
£140,000	60%
£150,000	61%
£200,000	62%
£400,000	65%
£600,000	66%

I have to admit, I’m surprised by the steady increase in tax (& not tax) you pay as your income increases.

I’m less surprised to see the minute you earn £20K is the minute your effective tax (& not tax) rate jumps above 25%.

In other words, that 20% idea goes out of the window.

I suppose the good news is the fact you have to earn £80K before giving up half your earnings and £140K before 60% goes walk about.

Incidentally, we stop at £600K incomes because that’s where the data stops, but anybody earning more can probably afford a tax accountant.

Surely it’s worth trying to get that 66%+ number down a bit. Ouch!

Talking of tax accountants. Not being one, I can’t be 100% sure, but my guess is, this is only the tip of the iceberg.

That’s just to say, there are probably other ‘not’ taxes that I haven’t considered that might do further damage to your income.

If it looks like a tax, smells like a tax and tastes like a tax…… it’s a tax!!!!

Just to be clear. I’m not saying you shouldn’t pay tax. Off course you should. I’m not even saying you shouldn’t pay all of these ‘not’ taxes.

All I’m really saying is if it looks like tax, smells like tax and tastes like tax can’t we just admit what it is?

(And if we can. Aren’t we paying a bit too much out of our salaries before we get to enjoy the fruits of our labour?)