The contents of voters’ pockets has always been a key motivating factor when it comes to deciding which party to place a cross next to. Few things encapsulate this kind of consumer politics more than the rate of income tax. The coalition has made great play of taking the lowest paid out of income tax altogether, but there remain various complications throughout the system, and genuine differences between the main parties’ proposals.
The coalition government has raised the personal allowance, the amount you have to earn before you start paying income tax, at every one of their budgets. The policy was a key demand of the Liberal Democrats after the 2010 election, and was brought in by George Osborne, despite David Cameron saying that it was not affordable in the leaders’ debates. Currently, people start paying income tax once they’ve earned £10,600. This will rise to £10,800 in 2016-17, and £11,000 in 2017-18. The Lib Dems want to bring forward the rise to £11,000 to 2016, and both coalition parties have ambitions to ultimately raise it to £12,500 (the current minimum wage), with the Tories saying that they will bring in a law to link the income tax threshold and minimum wage. National Insurance remains an issue. NI still applies to people who are nowhere near the income tax threshold, a fact the Lib Dems have pledged to address once the personal allowance reaches £12,500.
The 10p low rate of income tax was controversially scrapped by the last Labour government, when Gordon Brown was Prime Minister. However, current Labour leader Ed Miliband says he wants to reintroduce the rate if he wins in May. They will take the money saved by scrapping the Conservatives’ marriage tax allowance, and use it to set a new band above the personal allowance. The party say they cannot specify what income the 10p tax would cover, as the amount to be saved from culling the married person’s tax allowance is currently unknown. When Miliband first announced the plans in 2013, the independent Institute for Fiscal Studies said the idea “has no plausible economic justification” and that it would “achieve nothing that could not be better achieved in other ways”.
The coalition dropped the top rate of income tax to 45p in 2012, and Labour say that they will return it to 50p for those earning over £150,000. However, as fans of the Laffer curve will know, there is a rather intense debate over whether doing so would actually put more cash into the Treasury coffers. In January 2014, the Institute for Fiscal Studies conducted some research and concluded: “The best evidence we have still suggests that raising the top rate of tax would raise little revenue and make, at best, a marginal contribution to reducing the budget deficit an incoming government would face after the next election.”
While the coalition has been making changes at the top and bottom, there are complaints that they are dragging more and more middle income earners into paying the higher rate of 40p. In a research paper published at the end of last year, the Institute for Economic Affairs’ Ryan Bounce wrote: “The higher rate tax threshold has fallen by over 40 per cent relative to wages since 1979. The number of higher rate taxpayers has trebled since 1990”. Andy Silvester from the campaign group the Taxpayers’ Alliance points out that “the average wage in London, and indeed the south east, is not that far off the higher rate.” He says it is “ludicrous for a rate designed for the wealthiest.” The Conservatives are targetting lifting the higher rate band to incomes of £50,000 or more, but it is not yet clear how this will be paid for.
Despite a proposed income tax rise at the top end, Labour has pledged not to raise VAT after the election, arguing that the Conservatives will almost certainly raise this consumer tax.
Cameron has pledged his party won’t raise VAT either during a dramatic exchange with Miliband in the House of Commons, though this has simply raised questions about how some of his party’s spending promises will be funded.
The estimated number of people who were paying income tax in April 2010, who are now not paying it due to threshold changes.
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