Autumn Statement: Five million in UK will pay higher 40p rate of income tax

CHANCELLOR George Osborne’s decision to raise income tax thresholds by less than inflation will take one million more people into the higher 40p rate of income tax by 2015, the Institute of Fiscal Studies (IFS) said yesterday.

The move, announced in Wednesday’s Autumn Statement, will bring the total number of higher-rate taxpayers to almost five million – double the number at the end of the 1990s – and will mean the 40p rate is no longer something faced only by the “highly-paid few”, the economic think-tank said.

IFS director Paul Johnson said that overall, Mr Osborne’s statement reduced incomes for the wealthiest and for working-age people on benefits, while giving a little to pensioners and workers on modest incomes.

Mr Johnson warned that the implication of the statement was that more welfare cuts and tax rises totalling as much as £27 billion could be expected in the years after the 2015 election.

The IFS cautioned that the benefit cuts announced by the Chancellor on Wednesday may not actually save the government any money, given the other changes presented in a mini-budget which revised economic growth downwards.

“Welfare cuts over the next couple of years largely pay for two tax cuts, the cancellation of the fuel duty increase and the further increase in the income tax personal allowance,” said Mr Johnson.

However, Danny Alexander, the Lib Dem chief secretary to the Treasury, defended the Chancellor’s Autumn Statement.

Mr Alexander said: “Saying to people on benefits and tax credits, you are going to get a raise but not as much as you might have expected, and say the same to people who pay tax at the higher rate, and to ask for more from the wealthy in a variety of ways overall meets the test that I set out, which is we have to ask something from everybody as part of this process of adjusting to the fact that, as a country, we are much poorer than we expected to be.

“But overall we are asking more from the wealthiest.”
The IFS argued that if the Chancellor continues to protect spending in the NHS and schools, then budgets in “unprotected” areas such as the police, local government and defence, environment and transport will face cumulative cuts of 16 per cent in the three years to 2017-18, in the absence of welfare reductions or tax rises.

This would mean an overall squeeze of almost one-third (30 per cent) of the budgets of these unprotected departments since the formation of the coalition government in 2010, Mr Johnson said.

“That begins to look close to inconceivable,” he said. “Further welfare cuts and tax rises must be on the cards … £27bn worth would be required to protect other spending in real terms entirely.”

The three-year 1 per cent below inflation cap on rises in most benefits announced by Mr Osborne on Wednesday would “clearly create real losses for poor households with the least ability to cope with real falls in their income”, Mr Johnson said.

The much-heralded decision to lift tax thresholds so the first £9,440 of earnings are taken out of income tax was “an expensive policy at a time of fiscal hardship” which raised the personal allowance by a “paltry” £235, he added.

Mr Osborne’s attempt to recoup some money from the richest by cutting tax-free pension allowances “has little to recommend it” and will make planning for retirement harder, he said.

As a result of “fiscal drag” due to the 1 per cent rise in the higher-rate income tax threshold “we estimate that by 2015 there will be one million more higher-rate taxpayers than there are today, taking the number to nearly five million – double the number at the end of the 1990s,” Mr Johnson said.

“The higher rate is no longer something faced only by the highly-paid few.”

He added: “The effects of yesterday’s announcements will be to reduce incomes in the bottom half of the distribution, slightly increase them in the upper-middle – among workers on modest salaries and among pensioners – and to reduce incomes for the best-off.

“Working-age individuals receiving benefits and tax credits have been hit. The richest few per cent have been hit very hard.

“Pensioners, and those in work on more modest incomes have borne less of the burden.

“Some, of course, are riding out the hard times quite comfortably. But when you take account of what has happened to earnings, all parts of the working-age population have been losing out.

“In that sense at least, it is probably fair to say that those of us of working age really are all in this together.”

There were also concerns over whether the Chancellor’s failure to hit his target on debt will harm Britain’s credit rating. Ratings agency Fitch said it now expected that by 2015 debt will be “approaching the upper limit” consistent with retaining the coveted AAA status.