Middle Britain&#39;s tax rates &#39;could rise to 83%&#39;

Monday, January 31, 2011

Middle Britain's tax rates 'could rise to 83%'

Moderately high earners to suffer most, says Institute for Fiscal Studies analysis

Nearly a million people will see their tax rates soar as the government's austerity package kicks in this spring, potentially to as high as 83%.

Analysis from the Institute for Fiscal Studies today reveals that changes in April will drag 750,000 people into the 40% tax bracket. Meanwhile, little-publicised tax credit cuts will push the marginal rates of 175,000 working parents up above 70%. In theory, effective tax rates in Middle Britain could reach 83%, the rate that Labour levied on Britain's top earners before 1979.

A few days after the governor of the Bank of England, Mervyn King, warned that wages were set for their longest continuous squeeze since the 1920s, the IFS exposes how the tax changes will compound the misery.

Moderately high earners with children to support will suffer particularly. For example, a worker on �45,000 with a non-working spouse and two children will be worse off by about �1,000 per year after 6 April. This is on top of the extra VAT which families at all income levels have been paying since the start of the year.

With Conservative backbenchers growing restive about the tax burden on middle Britain, Tory high command will receive the analysis nervously.

Andrew Tyrie, who chairs the Treasury select committee, said it would want "to look carefully at the distributional impact and the effect on work incentives right across the income range and will be taking evidence from the IFS".

The coalition is planning �18bn of benefit cuts that will chiefly hit the poor ? the first round, a �2.3bn reduction, comes into effect this spring. However, the impact on middle managers and junior professionals will be more immediate, due to a mix of measures inherited from Labour and decisions by the coalition government. From 2013, the effect of rising marginal tax rates will be compounded by the complete withdrawal of child benefit from anyone who tips into the 40% tax band.

Gavin Kelly, of the Resolution Foundation thinktank which concentrates on low- to middle-income households, said: "Looking at these changes in the round, there is no doubt there is a group of working parents on wages of around �40,000 who will soon find that a pay rise leaves them little better off ? or possibly even worse off".

James Browne of the IFS warns the number of higher-rate taxpayers could continue to grow when the tax-free personal allowance is raised towards the �10,000 promised in the Liberal Democrat manifesto.

In order to claw back gains from the well-off, the first tranche of this allowance increase was coupled to a reduction in the higher-rate threshold.

If the coalition takes the same tack in future, Browne calculates that 850,000 more people ? in addition to the 750,000 this year ? will be dragged into the 40% band, some earning as little as �36,000 in today's terms. That is still above the average wage for an individual worker, but Kelly points out that large families reliant on such earnings can be "below the national average in terms of standard of living".

A Treasury spokesman described the government's approach as "a matter of fairness". He added: "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."

But with so many offsetting tax increases, few may notice a boost. The IFS is clear that the overall effect will be an average reduction in disposable income of about �200.

Tom Clark

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