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Taxes with a twist and private medical insurance

I wrote in the past about tax situation that a humble expat family is stuck in. Now, there is a little twist to ours.

As explained in that post, there are several tax brackets in the UK with very straightforward progressive taxation amounts applied to them. Calculating your tax liability is quite simple, as deductions, allowances, credits and all that fun stuff from the US tax code pretty much does not exist on these shores. Take your gross amount, apply a simple formula, and voilá, here is how much you owe to the government. How do accountants get employment in this place?

Well, it turns out that it’s not only down to foreign non-domiciled non-ordinary-resident nationals that there are variations to the tax code. Namely, tax brackets can get adjusted according to implied income.

Her Majesty Revenue Service has sent me an exceedingly polite letter, explaining in way too many words that since I receive private medical insurance from my employer, my tax liability need to be adjusted. In order to achieve that, they perform a weird exercise of decreasing thresholds. The first fifty-two hundred that are normally tax-exempt get reduced by the insurance cost, the 10% and 22% portions “slide down”, remaining the same in size, but starting at a lower threshold each (regular threshold minus the insurance cost), and the killer 40%, of course, takes up the remainder of your income, but that remainder is, effectively, increased by the amount of insurance cost.

Those of us more mathematically-inclined would clearly see that the end result turns out to be exactly the same as simply adding the amount of insurance on top of my gross income and taxing it at the highest rate. For all the others, trust me, I actually plugged the numbers into Excel to confirm that.

Why this calculation dance? Beats me. To be honest, with the amount of bureaucracy that this country generates, it would be a wonder if the tax code was as simple as it appears on the surface…

Cursory to that is the following question: Why private medical insurance? Isn’t healthcare free in England?

The short answer to the latter question, To a degree, helps explain the former. Most of the simple services, such as check-ups, emergency room visits, consultations for common illnesses, etc. are, in fact, free. You even get medicine for free at pharmacies (at least the children do), as long as it is prescribed by your General Practitioner (think Primary Care Physician). But if you need something more serious, a hospital stay or a visit to a specialist, you better have some additional cover. Your GP will give you a referral, the insurance company will approve the treatment in advance (sounds a lot like an HMO, doesn’t it?) and only then you will get the potentially life-saving medical attention.

It’s not likely that we’ll ever need something like this, but – as with any insurance – it is probably worth having. Especially, since the way my employment benefits work, if I reject this insurance, I will get its amount in cash, added to my salary. And will end up paying exactly the same taxes.

Now, if only we actually registered with a GP since coming to live here…