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UK: 100,000 middle class professionals taken out of 40p income tax rate

24 March 2015   (0 Comments)
Posted by: Author: Christopher Hoper
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Author: Christopher Hoper (The Telegraph)

The 1.4 per cent increase - the first for seven years - reversed the trend of "fiscal drag” which has seen ever more people sucked in to the 40p band over recent years.

One hundred thousand middle class professional have been taken out of the higher income tax rate under changes unveiled in the Budget.

The above-inflation increase in the level at which 40p income tax kicks in – the first such increase for seven years - will result in 100,000 fewer taxpayers at the higher rate.

The 1.4 per cent increase reversed the trend of "fiscal drag” which has seen ever more people sucked in to the 40p band over recent years.

The changes set out by Mr Osborne represent the first steps towards the goal set out by David Cameron at last year’s Conservative conference to increase the higher rate threshold to £50,000 by the end of the next Parliament in 2020.

People start paying the higher 40 per cent tax rate when they earn more than £41,865 a year.

Under plans set out in the Budget this will increase to £42,385 next month, £42,700 in April 2016 and £43,300 in April 2017. Officials said the rate would rise further to £45,020 in 2019.

The changes are worth £172 to those paying the 40p rate, and will cost the Exchequer £960 million in 2016/17, £1.48 billion in 2017/18, £1.585 billion in 2018/19 and £1.68 billion in 2019/20.

The figures set out by the Chancellor imply that Conservatives would require a dramatic leap in the higher-rate threshold in the final years of the next Parliament in order to reach Mr Cameron's target by 2020.

But Treasury sources said the announcement was a "down-payment” on future increases, and pointed out that levels could be revised upwards at subsequent budgets if Tories win the May 7 election.

A senior aide to the Chancellor insisted that hitting Mr Cameron’s target by 2020 would be "affordable” in the context of the £7 billion surplus which the Government is forecast to be running by the last year of the Parliament.

He added: "We have shown during this Parliament that we are able to cut taxes and reduce the deficit at the same time.”

Until now the Government had not set out how the higher rate threshold would be increased every year to get to the target of £50,000.

It emerged four months ago that nearly one million more people will be paying the higher rate of income tax even if the Tories raise the 40p tax threshold to £50,000 by 2020.

The forecast from HM Revenue and Customs showed that currently 4.6million people were paying income tax at the 40 per cent rate at £41,900 a year.

If the threshold were raised to £50,000 a year by 2020, 5.5million people would be paying income tax at 40 per cent – 900,000 more than do at present.

Mr Cameron was widely praised for helping middle class families by pledging at the party’s annual conference in September that a Tory Government will increase the 40p income tax threshold.

Saying he wanted to restore "fairness to tax”, Mr Cameron said the 40p rate was "only supposed to be paid by the most well-off people” yet teachers and police officers were being "dragged into it”.

Without Mr Cameron’s conference pledge, the number of people paying the higher rate would be 6.3 million by 2000.

A report last year by the Institute of Economic Affairs said: "In 1990 around one in fifteen income taxpayers paid the higher rate (1.7 million people).

"This had increased to about one in ten by 2010 (3.3 million) but has since increased significantly to one in six income taxpayers (4.6 million) by 2013/14.”

Part of the problem was that the Coalition had allowed the higher rate threshold to fall from £43,875 in 2010 to £41,865 in nominal terms, pulling in millions of taxpayers who had not previously paid tax at 40 per cent.

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