Chancellor George Osborne could hand middle and higher income earners a big tax break next week by increasing the threshold for paying the higher rate of tax.
Osborne is reportedly considering increasing the amount people have to earn before they start paying the higher 40p tax rate to £43,000 from the current threshold of £42,385 at next week’s Budget, with possible changes going into effect with the start of the new tax year next month.
The chancellor is also reportedly mulling lowering the top rate of tax from 45p to 40p – a cut that would benefit individuals earning more than £150,000 a year.
Osborne first sparked speculation that he would slash the top rate of tax last week, when he told MPs in the House of Commons that lowering the top rate from 50p to 45p in the last government raised an additional £8bn for the Treasury in its first year alone.
Osborne is also reportedly considering a faster increase in the personal allowance, which is set to rise to £10,800 from April and £11,000 in 2017, to reach £12,500 by 2020.
But tax experts have warned that the state of public finances, as well as the chancellor’s self-imposed target of balancing the books by the end of the decade, are likely to prompt the chancellor to increase other levies, such as fuel duty, to pay for the giveaways.
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“With a deterioration in the public finances since the Autumn Statement, the austerity that was expected then may well appear this time around,” said EY head of tax policy Chris Sanger. “As the chancellor will be looking at his options to help him balance the books, this can be expected to be a tax- raising and tax-generating Budget with the state of public finances giving little wiggle room for any largesse.
“The chancellor will have his focus fixed on achieving a surplus in 2019-20,” Sanger added.
A Treasury spokesperson declined to comment.