Julian Knight: Joining the 40 per cent club? What a drag

I'm not sure if the new tax year, which starts on Wednesday, represents the end of the beginning or the beginning of the end. After three years of mostly fiscal expansion in a bid to pump-prime the UK economy, this week marks the end of the expensive financial experiment as the tax calendar flips over from 2010-11 to 2011-12.

Normally, the change in a tax year brings some minor tinkering, but this time it seems a real red-letter day for coalition politics and the austerity to come.

Wednesday is probably a red-letter day for many of you too – not because it represents the chance to make use of a fresh ISA allowance, or the end to employers forcing you out of the door at 65 if you don't want to stop working (see page 97) – but because a fair percentage of you will start to find yourselves, suddenly, higher-rate taxpayers.

Fiscal drag à la carte is on the menu from 6 April. Let me explain. In 2010-11, people under 65 could earn £43,875 before they were taxed at 40 per cent, but in 2011-12 this figure drops to £42,475. That's a £1,400 cut – instantly pushing 750,000 people into a higher tax bracket.

Undoubtedly, over the next couple of years, the number of ordinary people who will be paying 40 per cent will increase enormously – middle-ranking teachers and police, senior nurses, performance-target hitting sales reps, some supervisors in call centres and retail middle managers will all be joining the unhappy 40 per cent club.

What's worse, is that when you see that money disappear from your paypacket you can bet that the very rich – despite the 50 per cent tax band – will probably be paying a lot smaller percentage of their salary because they can afford the accountants and wealth mangers who can help them, perfectly legally, to shelter their money from tax. Never has the tax system been so unfair to what Ed Miliband calls the "squeezed middle" – and the Labour leader, as a Gordon Brown acolyte, remember, has had at least one hand on the pliers doing the squeezing.

Taxing so many more people at 40 per cent can be largely self defeating, too. Think of it this way, if you're one of those shunted into the 40 per cent bracket and you have the opportunity to take on a little extra work, do a little overtime – where is the motivation when half of what you earn instantly disappears in tax and National Insurance? Fiscal drag soon leads to economic drag, and that's without mentioning the damaging effect of taking hundreds of pounds out of people's pockets in 40 per cent tax.

And if you thought the tales of the damage wrought by the cuts was becoming repetitive in the extreme; you haven't seen anything yet. The government spending cuts are about to go into overdrive. So, the end of the beginning? Yes, because the party which began in the mid-1990s finally ends on Wednesday. It's been a rag-tag affair for several years, a false economy of incredibly low interest rates and inefficient government spending that has been the equivalent of the stale punch sitting in the corner.

As for 6 April as the beginning of the end? Well, the date hardly has the same apocalyptic milieu as 2012 in the Mayan calendar, but whether or not it gets radically worse from here depends on so many factors: Will the coalition cuts genuinely work? Are they enough? Will the eurozone hold together? Will the Irish banks and government finances completely collapse? (Our exposure there is huge.) Will the economy slip back into recession? Can inflation be halted? Will the Government's tax take fall, sparking a crisis in the markets leading to much higher interest rates and further recession? Your guess is as good as mine as to whether all, some or none of this comes to pass. Nevertheless, 6 April starts a financial year when the answers to many of the questions above will become clear.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Suggested Topics
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Claims Administrator

    £16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

    Recruitment Genius: Senior SEO Executive

    £24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

    Recruitment Genius: Online Customer Service Administrator

    £16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

    Recruitment Genius: Digital Marketing Executive

    £18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

    Day In a Page

    'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

    Bread from heaven

    Dutch survivors thank RAF for World War II drop that saved millions
    Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

    How 'the Axe' helped Labour

    UK will be 'run for the wealthy and powerful' if Tories retain power
    Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

    The price to be paid for challenging the rule of extremists

    A revolution now 'consuming its own children'
    Welcome to the world of Megagames

    Welcome to the world of Megagames

    300 players take part in Watch the Skies! board game in London
    'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

    Charlotte Gainsbourg on 'Nymphomaniac'

    Starring in one of the most explicit films ever
    Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

    Robert Fisk in Abu Dhabi

    The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
    Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

    Vince Cable exclusive interview

    Charging fees for employment tribunals was 'a very bad move'
    Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

    Iwan Rheon is returning to his Welsh roots

    Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
    Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

    Everyone is talking about The Trews

    Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
    Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

    It's time for my close-up

    Meet the man who films great whites for a living
    Increasing numbers of homeless people in America keep their mobile phones on the streets

    Homeless people keep mobile phones

    A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
    'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

    'Queer saint' who bankrolled artworld giants

    British culture owes a huge debt to Peter Watson, says Michael Prodger
    Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

    Pushkin Prizes brings countries together

    Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
    14 best kids' hoodies

    14 best kids' hoodies

    Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
    Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

    The acceptable face of the Emirates

    Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk