10p Tax Rate Explained

The 10p tax rate, also known as 10% starter rate or 10p tax band, was a taxation scheme in the UK that was abolished in April 2008. The abolishment of the 10p tax rate has been criticised as hurting the lower-paid, working class areas of the workforce more than middle-class or well-off families, who can easily afford to pay the flat 20% tax rate.

How does the 10p tax rate work?

Before 2008, the 10p tax rate was introduced in the United Kingdom. This "starter" rate meant that anyone who earned over the personal allowance of £5,225 would only be eligible to pay 10% tax on the first £2,330 of their income. Anything else above this £2,330 would be eligible for the full, flat tax rate of 10% (the 10p tax).

This meant that working class people who earnt just over the personal allowance wouldn't be eligible to pay an excessive tax rate. Usually, if a worker earns just £1 over the personal tax rate, without the 10p tax they would be eligible to pay a whooping 22% rate of tax just because of this £1.

However, the 10p tax rate was abolished in April 2008. The rate of personal allowance was raised from £5,225 to £5,435 and the tax band was lowered from 22% to 20%. The loss of this 10% starter rate meant that anyone earning over £16,500 will pass less tax, whereas anyone earning under £16,499 will pay more tax. This is why the removable of the scheme was heavily criticised, as it inflicted more upon lower classes and workers on a low-wage than it did on people who could easily afford higher tax rates.

Working Example

As a working example of the 10p tax rate, if you earned £8,000 in the tax year 2007/2008 (when the 10p rate was still in motion), after taking away your personal allowance of £5,225 you would pay tax on the remaining £2,775 of your salary. Under the 10p tax rate scheme, your tax would be £342.90 (£233 for the first £2,330 over your personal allowance at the 10% starter rate and £119.30 for the remaining £545 which is taxed at 22%).

However, with the same salary after 2008, your tax would be £513, as you are paying tax on £2,565 (the amount over the new personal allowance) at a rate of 20%. This means you would be £14.17 worse off each month.

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