Osborne's big squeeze: 400,000 more workers to be snared in 40 per cent tax trapA record 4.5million could be paying the higher tax rate by the end of this Parliament
Chancellor George Osborne announced that the point at which workers start paying higher-rate tax was to increase by one per cent a year.
23:40 GMT, 5 December 2012
A record 4.5million workers could be paying higher-rate tax by the end of this Parliament.
The number in the 40 per cent band is expected to rise from 3.8million today by another 400,000 over the next three years, the Treasury said yesterday.
However, experts predicted the number dragged into the higher rate could be an additional 300,000 – which would in total account for nearly one in six taxpayers.
'It seems a bit unfair': Civil servant John Bilbrough with wife Helen and sons Ben, nine, and Zac, six (see Case Study)
John Bilbrough, 39, is a civil servant edging perilously closer to becoming a higher-rate taxpayer.
The father of two from Totnes, Devon, earns 39,700 as a project manager with the Environment Agency.
He expects that salary to increase in line with inflation, about 2.6 per cent, but with the higher tax rate threshold increasing by just 1 per cent to 41,685 – behind the inflation rate – he looks certain to pass it within a year or two.
Mr Bilbrough said that he and his wife Helen, 39, who earns 7,000 a year as a part-time office manager, will be paying more tax without actually being better off.
He said: ‘If we were both earning more than 40,000 I would say fair enough. But considering it’s only me, I don’t think we should be in the higher tax rate category. It seems a bit unfair.’
Yesterday, the Chancellor announced that the point at which workers start paying higher-rate tax was to increase by one per cent a year.
But as this increase is likely to lag behind pay rises, this will push anyone just below the limit today into the higher band.
Mike Warburton, of accountancy giant Grant Thornton, said: ‘The Chancellor’s move will drag many more hard workers into a higher-rate tax band, most of whom will not consider themselves wealthy by a long shot. Every year the starting point for 40 per cent tax keeps being pushed down.’
In the hope of raising 3.3billion by 2018, Mr Osborne announced he would limit the size of the increase in the personal tax thresholds.
Currently, everyone can earn 8,105 without paying a penny of tax. For the next 34,370 they earn they pay income tax of 20 per cent.
This means that once they have a salary of 42,475, they would pay 40 per cent income tax for every additional pound they earn.
Normally, these limits rise in line with inflation to take into account rises in the cost of living.
However, by raising the point at which higher rate is paid by a flat 1 per cent instead, which will happen for two years from 2014, more workers will be dragged into this 40 per cent band.
Next year, the point at which this starts will be 41,450. The reason for this initial drop is to stop wealthier taxpayers receiving an increase in the amount of income they can earn tax-free.
In 2014 the 40 per cent band will start at 41,865 and then will again rise in 2015, to 42,285.
The highest previous number of higher-rate taxpayers was 3.87million under the Labour government in 2007-2008. At the start of this Parliament there were 3million.
Money, money, money: Chancellor George Osborne left, walks with Chief Secretary to the Treasury, Danny Alexander, as he leaves the Treasury to deliver today's Autumn Statement
The Treasury’s own figures estimate there could be another 600,000 on top of the current 3.8million by April 2014.
This increase will raise 295million, and then 875million by April 2016 and 1.1billion after that.
The higher tax bills will hit families struggling to pay off mortgages and grappling with rocketing fuel bills and punitive petrol prices.
Earlier this year, research for the Institute for Fiscal Studies showed the higher-rate tax trap was hammering those earning ‘relatively modest’ salaries.
It also highlighted the huge rise in the percentage of all taxpayers caught in the 40 per cent tax net.
In 1978, the net ensnared three per cent of taxpayers, and edged up to five per cent by the late 1980s. But it has more than doubled to 12.5 per cent today, and is estimated to be 15 per cent next year.
At present, there are 29.7million taxpayers in Britain. Of the total, 4.1million, which is equal to 13.8 per cent, are either higher-rate or ‘additional’ 50 per cent taxpayers.