Comment: Chancellor has room for manoeuvre on 40p rate of tax

Martin Flanagan
Martin Flanagan
Have your say

FOR the first time, George Osborne will be driving the car without Liberal Democrat stabilisers when presenting his Budget a week on Wednesday. The background mood music on possibly cutting the top rate of income tax for those earning more than £150,000 to 40 per cent from 45 per cent suggests the Chancellor might enjoy the prospect of driving in the fast lane to an unequivocally Tory destination.

It is obvious where his natural inclinations lie on the issue. Labour increased that top rate of income tax from 40p to 50p in the febrile, angry slipstream of the financial crash.

But Osborne cut it to 45p in his 2012 Budget despite allegations he was feather-bedding the better off in society just when austerity was biting the less privileged. He rode out the storm, and managed to keep the Lib Dems on side, even though uncomfortably.

The same sort of criticism would be made again this time if he cuts the tax burden on the most affluent while slashing £12 billion in tax credits and other benefits paid to the poor.

The juxtaposition would be stark. And, according to your politics, it would either demonstrate the Chancellor’s impressive resolve to ride the Conservatives’ majority in the Commons or show a tin ear for calls for social equality and those with the broadest shoulders to carry the biggest burden.

Just as when he cut the rate to 45p, it would make it more difficult to argue that we “are all in it together” in these tough times for many. But – after cutting deals, compromises and trade-offs with its Lib Dem coalition partners for five years – it would be understandable if David Cameron wanted the fetters freed to fashion his vision of a lower tax, lower welfare economy.

Osborne, who is generally thought to be one of the most astute, “political” chancellors in recent times, also has more slack than might be thought if he decides to push through the top rate cut.

He might accompany any such move in the Budget by pointing out the Conservative policies that do not automatically favour the wealthy and spread the jam of lower tax wider.

The new government has already promised to cut pensions tax relief on the highest earners. And the Chancellor is also set to announce the start of his flagged £5bn crackdown on tax avoidance. Both would help dilute criticism that he is just helping his chums in the City with a top-rate tax cut.

That deflection of brickbats would be much strengthened if Osborne also made some progress in his Budget on 8 July in raising the threshold for the current 40p rate of tax.

This affects far more people than the top rate, and is widely seen as putting a halter on the aspirations of a growing middle class. The 40 per cent rate cuts in at a relatively low level of about £42,000, and has grown stealthily. It covered 3 per cent of taxpayers in the 1970s, but now a chunky 15 per cent. Osborne has room for manoeuvre.