Teachers and nurses dragged into top-rate tax bracket
Three quarters of a million people, among them nurses and teachers, will be dragged into the higher 40 per cent tax rate from April, according to the Institute for Fiscal Studies (IFS).
Tube drivers, senior nurses and teachers will all be paying the higher rate band – which until last year was the highest tax rate – for the first time.
A further 850,000 people will also have to be sucked into paying the 40 per cent rate if the Coalition Government is to meet its pledge on helping the lowest earners (those with incomes under £10,000) to pay less tax.
All this means that by 2015, 1.6 million more people will pay the 40 per cent tax rate than do so at the moment. The number of taxpayers in the higher bracket will rise from the three million it is now to five million, around one in five of the workforce.
The IFS's calculations reveal that the cost of taking the lowest paid out of tax is being shouldered squarely by what is regarded as "Middle England", although in reality, the immediate changes will only affect the top 10 per cent of earners.
This year, households will lose an additional £200 on average from tax increases and benefit cuts due in April, leaving them £500 poorer overall, according to the Institute's calculations. The Governor of the Bank of England, Mervyn King, warned last week of the tightest squeeze on living standards since the 1920s.
A freeze in the higher rate tax threshold, currently £43,875, was announced while Alistair Darling was Chancellor of the Exchequer as a revenue-raising move. The current Chancellor, George Osborne, decided to extend the policy so that the better-off would not see any benefit from the large rise in the personal allowance from April this year, which will jump from £6,475 to £7,475. That move was a first instalment on the Coalition's target of stopping those earning under £10,000 from having to pay any income tax – a key manifesto pledge of the Liberal Democrats.
Someone earning £43,875 will this year pay £7,480 in tax; next year the bill will be £7,560. The new threshold will also see more families losing their entitlement to child benefit once it becomes means-tested at the threshold rate in 2013.
The policy threatens to reawaken fears within the Conservative Party that its traditional commitment to low personal taxation has been sacrificed to the need to appease the Liberal Democrats. The Conservative Mayor of London, Boris Johnson, last week renewed his calls for lower taxes.
The recent shock figures for growth showing that the economy shrank by 0.5 per cent in the last three months of 2010, also sparked renewed calls for tax cuts to stimulate enterprise and support the stumbling economy.
Overall, ministers in both parties will be pleased that the IFS says that the richest in society will bear the biggest burden. With changes in national insurance, those on more than £150,000 will face a marginal tax rate of 52 per cent.
The question of whether the Chancellor's plans are "progressive" or "fair" has been intensely fought since Mr Osborne unveiled his emergency Budget in June. Around £5.4bn will be taken out of the economy by the tax and benefit reforms to be introduced this year.
This represents an average reduction in household incomes of around £200 in 2011–12, and comes on top of the increases in VAT, fuel duties and insurance premium tax that were levied in January 2011, that are forecast to raise £12.8bn, or around £480 per household on average.
The biggest losers are the very rich, who are particularly affected by the restriction on the amount that can be contributed to a private pension. This is in addition to the measures introduced in April 2010, that brought in a 50p in the pound tax rate for those earning more than £150,000 and withdrew the personal income tax allowance for those on £100,000 or above.
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