Thursday, February 03, 2011

We Are All In It Together

As many as 750,000 income taxpayers will find themselves in a higher tax bracket this April, a new study has claimed.

According to the Institute for Fiscal Studies (IFS), three-quarters of a million people will see some of their earnings lifted into the 40p in the pound tax band come 6 April. The threshold at which workers start to pay the 40 per cent tax rate is to drop from £43,875 to £42,475 from that date.

At the same time, the personal allowance threshold, the point at which earners become liable to income tax, is due to rise by £1,000 to £7,475. As a result, the higher 40 per cent rate will apply to incomes above £35,001. For this financial year, the 40 per cent rate applies only to incomes over £37,401.

The IFS analysis of the impact of the changes suggests that as many as an extra 750,000 people will start paying income tax at the 40 per cent banding.

Set against a general economic background in which real earnings are looking likely to stagnate, the IFS said that the average household will be £200 worse off under the new tax regime. However, as many as half a million lower income workers will be better off because of the rise in the personal allowance threshold.

The report suggested that the biggest losers from the new measures will be higher income households. They will lose because of the increase in employee's national insurance contributions, while they won't gain from the increased income tax allowance. A minority will also suffer from the restriction in the amount that can be contributed tax free to a pension. IFS calculations indicate that the best-off 10 per cent will, on average, shed 3 per cent of their net income as from April compared with an average of 1 per cent for the rest of the country.

This will come on top of the new 50p rate on incomes above £150,000 and the loss of the personal tax allowance for all those with incomes over £100,000. From 2013, the effect of rising marginal tax rates will be compounded by the complete withdrawal of child benefit from anyone who tips into the 40 per cent tax band, the IFS continued.

Moderately high earners with children to support will be hit especially. A worker on £45,000 with a non-working spouse and two children will be worse off by about £1,000 per year after 6 April. This will be in addition to the extra 2.5 per cent in VAT which all consumers have been paying since 4 January.

James Browne, I bet he feels good, a senior research economist at the IFS who authored the report, warned that the number of higher-rate taxpayers could go on rising when the tax-free personal allowance is raised towards the £10,000 mark, as promised in the Liberal Democrat manifesto.

Should the Coalition Government persevere with a similar policy in the future - recouping the gains that would have been made by the well-off when the personal allowance rises with a reduction in the higher-rate threshold - then a further 850,000 taxpayers could be shifted up into the 40 per cent band, with some earning as little as £36,000 in today's terms.

James Browne said: "This is a mans world," before adding, "Further reductions in household income are inevitable as government policies aimed at helping to reduce government borrowing from its post second world war high are introduced. The set of the changes coming in April is complex and the pattern of gains and losses reflects this. Perhaps less remarked upon are the changes in marginal tax rates. While taking 500,000 out of tax altogether, the way that the government has increased the personal allowance to ensure that higher rate taxpayers don't gain will increase the number of higher rate taxpayers by 750,000. We calculate that a further 850,000 would be brought into this higher rate bracket by 2014-15 if the government reaches its ambition of a £10,000 allowance in the same way."

A Treasury spokesman responded: "Stable, balanced public finances benefit everyone as they create the right conditions for growth and help keep interest rates down. The government have had to make tough choices but have always been clear that those with the broadest shoulders should carry the greatest burden. It is a matter of fairness. We cannot justify taxing the poorest to pay benefits such as tax credits and child benefit to higher earners. The changes to be made in April mean that tax credits will be targeted at those who need them most. Tax credits will be targeted at those who need them most. At the same time, personal tax changes will remove nearly a million of the lowest earners out of tax altogether and around 23 million basic rate taxpayers will gain by £170 per annum."

Of course there would have a been a time, not that long ago, when the people in the 40 per cent band would have been exclusively middle class professionals but today it's just as likely to be nurses and train drivers caught. That said we have to start eating into the deficit in order to stop the debt increasing, it will be interesting to see the coalition plans for business in the Budget though because it's a brave chancellor who takes and doesn't give anything in return. The Conservatives were committed to lowering Corporation Tax rates, whether or not that is still feasible remains to be seen.


Span Ows said...

You enjoyed that didn't you? ;-)

You quite rightly point out that many many people are now "caught", which of course means that they get paid more. I suggest asking all those who will pay more tax be asked if they would like to earn less to enable them to pay the same tax as before.

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