UK: Cut higher tax rate for middle earners, says Lord Lawson
14 March 2014
Posted by: Author: James Kirkup
Author: James Kirkup
Too many "middling professionals” have been dragged into the higher band of tax and should have their burden cut, according to the Conservative chancellor who introduced the 40p rate.
Lord Lawson of Blaby told The Telegraph that Coalition policies that were pushing more and more middle earners into the higher rate of tax were "a mistake”.
George Osborne, the Chancellor, is expected to use his Budget to further increase the starting threshold for income tax, cutting tax for low earners.
He is also expected to cut the threshold for 40p tax in real terms, pushing more workers into the higher-rate band.
Instead of changing income tax thresholds, Mr Osborne should use his Budget next week to cut the basic rate of income tax by 1p, Lord Lawson said.
The comments from the former chancellor will intensify the pressure on Mr Osborne over the growing number of people who pay the higher rate of tax, which starts to bite at £41,450.
When Lord Lawson introduced the 40p rate in 1988, about 1.35 million people paid it. This year, 4.4 million people are in the higher-rate band and the figure is on course to exceed five million as early as next year.
Conservative MPs say that the 40p rate is now catching many workers of relatively modest means, including public servants such as senior teachers, nurses and police officers.
Lord Lawson said he agreed with the backbenchers worried about the 40p rate.
"Far too many people are paying the 40 per cent rate. The total should be much closer to the number when I was chancellor,” he said.
In his 1988 Budget, Lord Lawson cut the top rate of tax from 60p to 40p, a rate that has remained part of the tax system ever since.
Lord Lawson said that he never intended the 40p rate to be levied on many of those workers who now found themselves in the higher band of tax. "It was intended for the rich, the well-off. The people who are paying it today are middling professionals who should not be in the higher rate.”
He added: "If you earn £45,000, you are neither rich nor poor – you are in the middle. You are certainly not rich. No one on £45,000 should be paying a marginal rate of 40 per cent tax.”
In a policy first suggested by the Liberal Democrats, the Coalition has pushed the personal allowance to £10,000, and Mr Osborne is next week expected to announce another rise to at least £10,500.
Ministers say a higher allowance cuts the tax bill for the low paid and has taken more than two million out of income tax altogether. But Lord Lawson said recent rises in the allowance were an error, and that the money would be better spent on other tax cuts. "The personal allowance has been increased too far. I think it is a mistake,” he said. "It was reasonable to do something at first, but no longer.”
Lord Lawson, who is sometimes consulted by Mr Osborne, suggested that the Chancellor would like to help middle earners, but is being blocked by the Liberal Democrats.
He said: "It is a function of coalition government that the Budget is negotiated with the Liberal Democrats, who are very hostile to those on middle incomes. It means George Osborne is not able to produce the Budget he would like to.”
David Cameron this week rejected calls to help people hit by the 40p rate, insisting that he would focus on increasing the starting threshold to help those on low incomes.
An all-Conservative government would cut the basic rate of tax, not change thresholds, Lord Lawson suggested.
"Cut the basic rate from 20p to 19p; that would be much more effective than putting up the allowance to £10,500,” he said. "That would give people the encouragement that rates will continue to go down. The direction of travel is important here.”
Calculations by The Telegraph last week revealed that higher-rate taxpayers were now contributing more than those on the basic rate, despite being outnumbered six to one.
The 4.4 million higher-rate taxpayers will this year contribute £56.2 billion to the Exchequer. Their average tax bill will be £14,300. By contrast, the 24.3 million basic-rate taxpayers’ combined contribution will be £54.3 billion. Their average tax bill will be £2,820.
The balance between the two groups has tipped sharply under this Government. In 2011-12, the first full financial year of the Coalition, basic-rate payers contributed £61.3 billion while those on the 40p rate contributed £49.6 billion.
The Treasury defends its policy by arguing that the increase in the basic rate threshold also benefits some 40p payers, meaning their overall tax bill is lower.
Despite the pressure on Mr Osborne, some backbenchers have been rallying to his side over thresholds.
Jacob Rees-Mogg suggested that the fact that more people were being lifted into the higher rate was something to celebrate.
"This is the long-term effect of fiscal drag, whereby earnings rise faster than inflation,” he said. "It is, in its way, a measure of its success rather than of its failure for it illustrates the increasing prosperity of the nation.”
This article first appeared on telegraph.co.uk.