War on Britain’s aspirational classes

 
Allister Heath
THERE is something very wrong with Britain’s tax system. Imagine you are an aspiring, successful hard-working individual; after several years putting in the hours, you now earn £42,475 a year. You’re already a victim of the tax system: you pay no tax on your first £8,105, but then face 20 per cent tax on the rest, as well as 12 per cent national insurance (using 2012-13 numbers). Above the zero-rated band, you hand over 32 per cent of your income to the state – and probably don’t even realise your employer has to pay an extra 13.8 per cent on top in extra national insurance. Many see this as a corporate tax, but in fact it is a tax on labour, equivalent to an overall rate of 40.2 per cent.

The broader picture is just as grim: your real wages are going down thanks to 3.9 per cent retail price inflation, with mortgages on the rise again. When you spend what is left of your money, you are hit again: 20 per cent Vat on most goods and services, massive “sin” taxes, air passenger duty, all payable out of your post-tax income. Don’t even dream of the £250,001 flat down the road, for which you have been saving for years: stamp duty is payable at three per cent. Your total tax bill including council tax will end up at well over half of a year’s income.

Now you get a £3,000 pay rise. But wait: you get caught by the 40p tax rate, as well as by the extra 2p national insurance. Your £3,000 is only worth £1,740. But because you have two kids you could soon also lose your £1,752.40 in child benefits, which means you are actually worse off than before your not insubstantial 7 per cent pay increase. Such are the unintended consequences of George Osborne’s plans to remove child benefits from 40p taxpayers. You (and many like you) are better off working less. It’s madness – and that’s even before other benefits, tax credits and income-contingent student loans. In truth, it makes no sense for the state to pick people’s left pockets via taxes merely to return cash to their right pocket via benefits (with a chunk wasted on bureaucracy). Universal benefits are dumb. But the proposed reform is technically flawed. There should be a deal: cut benefits for workers but also cut tax in return – regrettably, not what Osborne is proposing.

Let’s now assume you continue to work hard, start a business, or climb the corporate ranks. That remains the meritocratic dream of millions of Brits, many of them from humble origins. Imagine you are one of the lucky few that breaks the £100k barrier. But between £100k and £116,210, you lose £1 of your personal allowance for each £2 hike in income. You refuse to be discouraged and end up on over £150k, from where you retain just 48 per cent (and just 42.2 per cent if all national insurance is included) of your marginal income. Taxpayers can still get tax relief if they tuck cash away in a pension, but that too is under threat. And if you scrimp and save for a four or five-bed home for your family, you will be hit by at least £20k in stamp duty.

Yes, the UK is truly a great place for the hard-working, law-abiding classes: high inflation, rock-bottom saving rates, rising petrol prices, surging mortgage rates, ever higher direct and indirect tax – and now the threat of extra council tax for those with family homes and reduced benefits with no compensating tax cuts. The millions of folk who make up the UK’s aspiring, entrepreneurial, business and professional classes are the bedrock of Britain’s prosperity – so why does nobody in government stand up for them any more? Are the Tories asleep?

allister.heath@cityam.com
Follow me on Twitter: @allisterheath