Three-quarters of a million 'to pay higher rate of tax'

Three-quarters of a million people are set to become higher rate taxpayers as a result of Government reforms to the system, a report indicated today.

Around 750,000 people will start paying income tax of 40% on their earnings from April 5 due to the decision to reduce the threshold at which the higher rate kicks in to £35,001, from £37,400 this year, according to the Institute for Fiscal Studies (IFS).

But around 500,000 people will be lifted out of paying income tax altogether, as a result of the £1,000 increase in the amount people can earn tax-free, raising the threshold to £7,475.

Overall, the group estimates that the average household will be £200 a year worse off as a result of the tax increases and benefit cuts.

The Government is also increasing the main rate at which National Insurance is charged from 11% to 12% from the start of the new tax year, while people will also be charged 2% not 1% on earnings above £42,484.

The changes are bad news for households, with many families already struggling in the face of high inflation and stagnant earnings growth.

The IFS said the reforms would hit higher income households the hardest, with some people in this group also likely to be affected by the new restrictions on how much can be paid into a pension tax-free each year.

It estimates that the richest 10% of people will lose 3% of their net income from April 6, compared with a 1% loss for the population as a whole.

Those with the highest incomes have already been hit by the new 50% tax rate for people earning more than £150,000 and the loss of the personal tax allowance for those on more than £100,000.

At the other end of the spectrum, people reliant on means-tested benefits will see their incomes hit by the Government's decision to increase payments in line with inflation as measured by the Consumer Prices Index, rather than the Retail Prices Index, which tends to be higher.

CPI was running at 3.1% in September, the month that benefit increases are based on, while RPI was considerably higher at 4.8%.

James Browne, a senior research economist at the IFS, said: "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 said: "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's 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.

"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 on average in 2011-12."