Five million to pay 40p tax rate in 2014

Tim Wallace
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ONE-IN-SEVEN workers will pay the higher rate of income tax by 2014 thanks to George Osborne’s changes to the tax brackets, according to estimates from a leading think-tank.

Five million people will be in the 40p tax bracket in 2013-14 – a rise of 1.3m from 3.7m in 2011, the Institute for Fiscal Studies (IFS) believes, taking the proportion paying the higher rate to 15 per cent of the workforce.

That compares with just five per cent who paid it in the late 1980s when the rate was initially set at 40 per cent.

“This is part of a long-term trend towards the encroachment of 40 per cent income tax onto people earning above-average but relatively modest salaries,” said the IFS’ director Paul Johnson.

“It would be useful to know if the chancellor has a view as to what proportion of taxpayers should be paying the higher rate.”

Those earning over £41,450 will pay the tax from April 2013 – a cut from the £42,475 it was previously expected to stand at, denying higher earners the full benefit of the larger tax-free allowance.

Meanwhile, the IFS warned the government had only implemented a small proportion of the planned budget cuts so far, representing a major risk to Osborne’s chances of hitting his deficit targets.

The Institute of Economic Affairs (IEA) also warned that official claims the government will eliminate the deficit in five years are based on optimistic economic growth forecasts.

The chancellor will only meet the targets “by the skin of his teeth,” warned Arbuthnot economist Ruth Lea at the IEA yesterday, arguing a worsening of the Eurozone debt crisis or further rises in oil prices could mean they are missed.