Budget 2012: 1.3 million forced to pay higher income tax

The Institute for Fiscal Studies (IFS) said the changes in the tax regime unveiled by the Chancellor will mean up to five million people across Britain will pay the 40p rate.

The IFS said this represents 15 per cent of all earners – compared to just 3 per cent in 1978/79 and 5 per cent throughout the 1980s.

Director Paul Johnson described the Budget as “a hotchpotch of tax changes” and warned it might be difficult for the UK government to claw back income lost from raising the personal allowance to £9,205 and cutting the 50p top rate to 45p.

In a scathing report, the think-tank also attacked Mr Osborne’s claim that he had produced a reforming Budget that helped working families.

• Read the full IFS analysis

IFS analyst Robert Joyce said: “Households with children lose the most as a percentage of income.”

The think-tank raised doubts over the claims made in the Budget about how much revenue would be generated by other measures such as raising stamp duty on homes worth £2 million or more.

However, the report was less critical of the Chancellor over the freezing of pensioner personal allowance, a move that was quickly dubbed the “granny tax” after Wednesday’s Budget.

Mr Johnson said the measure was a “modest increase” on a group that had been sheltered from austerity measures in previous Budgets.

And there was a warning that the Chancellor’s estimate of needing to take £10 billion more out of welfare after 2015 might be an under-estimate, with the IFS’s Carl Emmerson saying the figure might be £20bn.

Mr Osborne said yesterday he would not personally benefit from cutting the 50p tax rate to 45p because his income was not high enough, and rejected claims that he had produced a Budget for the rich.

He said: “We are getting more money from the wealthiest in our country.

“We’re charging them more when they buy a house, we’re stopping them having unlimited reliefs on their tax which they’ve had under the previous government, and we’ve got rid of a tax rate which everyone around the world looking at it said is costing us jobs and investment.”

He also argued that even those who would be dragged into the higher tax rate would benefit from the rise in the personal tax allowance and be better off.

Downing Street would not say whether Prime Minister David Cameron has benefited personally from the cut in the 50p rate for those earning £150,000 or more. A spokesman said tax arrangements were “a private matter between ministers and HM Revenue and Customs”.

The spokesman declined to say whether Mr Cameron, who declares rental income from a London property on top of his £142,500 salary, paid the top rate, which is due to fall to 45p in April 2013.

The Prime Minister said: “My own salary is published, it’s on the record. I cut it by 5 per cent, I’ve frozen it for the whole of the parliament and I’m quite content to do that, but all my interests are declared.”

Labour shadow chancellor Ed Balls pledged to reverse the cut to the 50p top rate, calling it the “wrong tax cut at the wrong time”.

He told MPs: “If there’s a general election tomorrow, our manifesto will say clearly we would reverse it. There’s the clearest answer I’m going to give.”

He said that 50p rate cut to 45p was a poor comparison with “squeezing the middle” more by dragging at least 300,000 people into the higher 40p rate. He said: “The tax rise on pensioners is not the only tax rise hidden in the Budget.

“The lowering of the higher-rate threshold means 325,000 more people in the squeezed middle will be paying the 40p rate of tax.

“Yet at the same time as people on £41,500 will have to pay more, David Cameron and George Osborne are giving a tax cut of over £40,000 to 14,000 people earning over £1m.”

Mr Balls mocked the Liberal Democrats’ description of Mr Osborne’s speech on Wednesday as “a Robin Hood Budget”.

He said: “This Budget takes from lower and middle income families to give to the rich. Don’t they see the Chancellor is not Robin Hood, he’s the Sheriff of Nottingham, and as for jobs and growth, he couldn’t give a Friar Tuck.”

The government also yesterday continued to push the raising of the tax threshold to £9,205 – saving earners £220 a year – as the biggest tax cut in a generation.

But the IFS pointed out that it was partly paid for by dragging more earners into the higher rate.

Mr Johnson noted that while the overall number of income tax payers will fall by 675,000, this change will increase the number of higher-rate payers by 325,000.

He went on: “Put that together with the freeze in the basic rate limit, and fiscal drag more generally, and the number of higher-rate payers could increase from 3.7 million in 2011 to five million by 2014.”

He added: “This is part of a long-term trend towards the encroachment of 40 per cent income tax on to people earning above-average but relatively modest salaries.”

He was also highly critical of an increase in stamp duty on homes worth £2m to 7 per cent, saying that it was a step backwards in terms of tax reform.

And he raised serious doubts for the future claiming there were too many unknowns in the Budget to know whether the books would balance.

He said Mr Osborne had made too many assumptions on what his measures would cost or bring in and that he could find himself having to find more money.

Mr Johnson said: “We do not know with anything like such certainty that the cut in the 50p rate will cost only £100m. We do not know that the proposed caps on tax reliefs will bring in the £300m or so the Chancellor is banking on.

“Nor do we know that the stamp duty changes will raise the nearly £300m that he has pencilled in.”

He added: “This Budget may turn out to be less fiscally neutral than intended.”

Responding to the IFS prediction of sharp growth in the numbers paying the 40p rate, the director of the TaxPayers’ Alliance, Matthew Sinclair, said: “A tax rate that used to be reserved for rich people is now paid by millions of middle-class workers.

“The government have yet again made that a lot worse and dragged hundreds of thousands more into the higher rate at the Budget, so those who work hard and aspire to a better standard of living keep less of their money when they earn more.

“In theory the rate is 40 per cent, but in reality, once you include National Insurance, it is more like 50 per cent. That is an unfair and economically senseless rate to tax so many people at, and will undermine economic growth.”