Budget Special: Cautious Clarke woos middle class

THE BUDGET AND YOU: Income Tax and national insurance
Click to follow
The Chancellor has targeted the income tax cuts straight at the great mass of middle-income earners, including the many disaffected voters the Tories need to win back in time for the election.

Tax experts said that although someone on pounds 30,000-pounds 35,000 a year might gain around pounds 400 a year, this would be almost wiped out for a typical home-owning family by the impact of a single 0.5 per cent mortgage rate rise. But the tax cut contrasts with hefty hits for the middle classes in 1993 and little help for them in 1994 and 1995.

Mr Clarke chose to restrict the basic income tax reduction to 1p, costing pounds 1.25bn next year, while spreading the equivalent of another 1p off the basic rate around a series of changes in allowances. These will be only partly offset for above-average earners by a higher ceiling on national insurance payments.

The upper earnings limit for employee NI contributions has been raised by pounds 10 a week to pounds 465 a week, so those at or above the old threshold will pay about pounds 1 a week more. The Government confirmed a token reduction of 0.2 per cent in employers' contributions to 10 per cent announced last year.

The decision to announce a small cut in the basic rate of income tax for the second year running as a centrepiece of the Budget confirms that the Chancellor is not in an adventurous tax-reforming mood, which would be a risky strategy anyway so close to an election. But he did more than once reiterate his promise of an eventual move to a 20 per cent basic rate.

He has, however, chosen what tax experts such as the Institute for Fiscal Studies regard as the least reformist set of options in a tax system that has long been due for an overhaul.

Tim Jones, a senior manager with Arthur Andersen, said: "He is trying as best he can to target those on pounds 30,000 to pounds 35,000 a year." But he believed that the Chancellor had been basically very cautious. "A Chancellor in a tight corner thinks twice, says a great deal and does nothing."

In fact, the Budget benefits for 3.5 million employees in profit-related pay schemes will be more than offset in subsequent years by the phasing out of this relief.

For a higher-rate taxpayer in a PRP scheme, this will cost up to four times as much as the direct benefits from this Budget, and for standard- rate payers typically up to twice as much. But the Chancellor has delayed the start of the phasing out.

The income tax changes included help for the lower paid, who do not benefit at all from a cut in the basic rate of income tax. They will benefit from a pounds 200 widening, to pounds 4,100, of the band in which the 20 per cent lower rate of income tax is paid.

But this is only pounds 100 more than Mr Clarke was obliged to announce simply to cope with inflation, and is worth less than pounds 1 a week to those affected.

Calculations by the IFS have shown that changes in the basic rate, personal allowances and the lower tax band, on which the Chancellor has relied, bring very little help to the poorest 30 per cent of the population, who pay little tax or none at all.

The IFS has been campaigning unsuccessfully for a cut in VAT, which would be a far greater benefit for the poor.

The greatest boost from the income tax changes will be felt by those paying basic-rate tax on their incomes. In practice, this means those earning between about pounds 8,000 and pounds 32,000 before personal, married couple and other allowances are deducted.

According to Arthur Andersen, the combined impact of tax and national insurance changes, ignoring the married couple's allowance, is a boost of 0.9 per cent for take-home pay of someone earning pounds 8,000 a year.

For someone on pounds 16,000 it is 1.1 per cent, on pounds 32,000 1.3 per cent and at pounds 64,000 it falls back to 0.65 per cent.

Above the level at which the 40 per cent tax band starts, the cash benefit of a cut in the basic rate stays constant for taxpayers, whatever they earn.

The Chancellor has increased personal allowances by pounds 280 to pounds 4,045, pounds 200 more than statutory indexation, and increased personal allowances for those aged 65 and over by pounds 310, again pounds 200 more than indexation.

There is a rise in the threshold at which the top rate of 40 per cent is paid, by pounds 600, but this is simply indexation, not an additional help.

Similarly, the married couple's and related allowances, the blind person's allowance and the income limit for age-related allowances will all be raised in line with statutory indexation.

The Inland Revenue said all income taxpayers, around 26 million people, will pay less income tax, by an average of pounds 150 a year or pounds 2.88 a week.

A couple with one breadwinner on average earnings will be around pounds 214 a year or pounds 4.11 a week better off.

Officials also said 16.6 million people will see a fall in their marginal rate of tax, 410,000 people would come out of income tax altogether and more than a quarter of all taxpayers would only pay income tax at 20 per cent in 1997/98.

Although there were sharp increases in the overall burden of income tax in 1993, mainly because of changes in mortgage and other allowances, since 1979 the Government has made big reductions in income tax rates. The basic rate came down from 33 per cent to 30 per cent in 1979, when the top rate dropped from 83 per cent to 60 per cent.

The basic rate was reduced progressively to 25 per cent in 1988 and 24 per cent last year, while the top rate was cut to 40 per cent in 1988, where it remains.