Budget will drag 325,000 into higher rate of tax, warns IFS

Think-tank says Osborne's plans are no more strategic reform than political expediency
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Five million Britons on "relatively modest" salaries could find themselves liable for higher rate income tax by 2014, the Institute for Fiscal Studies think-tank has forecast.

At present, 3.7 million people are required to pay tax at the 40 per cent rate, which falls on incomes exceeding £42,475. And this week's Budget, which will lower the qualification threshold to £41,450 from next year, will pull another 325,000 people into the bracket. The IFS has predicted that "fiscal drag", whereby the Government fails to increase tax thresholds in line with inflation, on top of this could result in another 1.3 million people paying the higher rate within two years.

"This is part of a long-term trend towards the encroachment of 40 per cent income tax on to people earning above-average but relatively modest salaries," said IFS director Paul Johnson.

The Chancellor lowered the 40 per cent threshold this week in order to prevent higher rate taxpayers from benefiting disproportionately from the increase in the tax-free personal allowance to £9,205. Higher rate taxpayers will find themselves £42.50 a year better off thanks to the increase in the tax-free allowance, while basic rate taxpayers will benefit by £170 a year.

The proportion of taxpayers paying the higher rate has been growing over four decades. In the late 1970s, 3 per cent of earners were liable. After the reforms of the previous Tory chancellor Nigel Lawson, 5 per cent paid the higher rate. Next year 15 per cent of taxpayers will be liable. "It would be useful to know if the Chancellor has a view as to what proportion of taxpayers should be paying at the higher rate," said Mr Johnson.

In his Budget statement this week Mr Osborne boasted that he was unveiling "a simpler tax system, where ordinary taxpayers understand what they are being asked to pay". But Mr Johnson criticised the Chancellor's approach to tax reform.

"Despite the range of changes it is hard to see this as the Budget of a truly tax reforming Chancellor," he said. "The hotch-potch of reforms bears as many marks of political expediency as it does of strategic reform." Mr Johnson was scathing about the increase in stamp duty on properties worth more than £2m. "To see another Chancellor increase again such a poorly designed and distorting tax does not bode well for tax reformers," said Mr Johnson. He argued that the "mansion tax," pushed by Liberal Democrats, would have been better.

Mr Osborne's Budget was "fiscally neutral," meaning that every announced tax cut was matched by a tax increase or a spending cut. But the IFS warned yesterday that not all of the tax revenues that the Chancellor is counting on would necessarily materialise.

"Those who have got a taste for avoiding the 50p rate may continue to avoid the 45p rate, even if they wouldn't have done so had the 50p rate never existed" said Mr Johnson. "This Budget may turn out to be less fiscally neutral than intended" he added.