Thursday 22 March 2012 10:49 pm

Osborne’s middle class tax bombshell

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THERE was a time when the 40p income tax rate was paid only by a tiny minority. No longer. Next year, 5m taxpayers – 15 per cent of the total – will pay this higher rate, according to the Institute for Fiscal Studies, compared with only 3.7m a year ago. For a chancellor supposedly committed to improving incentives to work, this is a monumental blunder. The top rate (which in reality is 42p with employees’ national insurance) will start at £41,450 in 2013 – now frighteningly close to the average full-time male income of homeowners of about £37,000, according to the Halifax.

One of the Institute for Fiscal Studies’ other findings is that the phasing out of child benefit for those on incomes between £50-60,000 adds 11 per cent to the marginal tax rate of families with one child, 18 per cent to that with two and 24 per cent to that with three. To this another factor must be added: student loan repayments. Starting at an income of £15,795 per year, employees with a student loan (taken out since 1998) start to pay back their debt – this happens through the pay as you earn process via a levy of nine per cent on income above that threshold. In other words, rather than feeling like a mortgage, where payments happen regardless of circumstances, the student loan repayment system feels like extra income tax.

There are lots of three child families, therefore, where the main earner will now be paying a 66 per cent marginal tax rate. A smaller but still substantial number, when student loan repayments are included, will be losing a total of 75 per cent of their marginal income. And all of this excludes the 13.8 per cent extra tax levied on these incomes via employers’ national insurance. Of course, families with four or more children will be paying even more – in a few cases, horrendously so. Roughly 400,000 families will lose some (but not all) of their child benefit and will be hit by these crippling marginal rates. Around 500,000 parents will have to register for self-assessment. In some cases the benefit will be paid and the tax will come later. Families will be incentivised to split or not to live together, and there will be intrusive policing.

Don’t get me wrong. I’m in favour of fees for university, as those who enjoy a higher education reap most of the rewards. I’m also against universal welfare benefits. It is wrong that prosperous families are given handouts – but in return they should be taxed much less. But Osborne’s reform is poorly constructed. He has improved the marginal tax rates for over 500,000 folk at the bottom: if you earn less than the personal allowance, the rate you face on an extra pound of earnings is very low (though you may still pay national insurance and of course you then have the problem of the withdrawal of other benefits). Osborne will also improve incentives for those at the top, thanks to his forthcoming 45p rate. But he has made the situation worse for the 1.3m being dragged into the 42p tax rate and for the 400,000 parents affected between £50k-£60k. The range over which the personal allowance is withdrawn also keeps on increasing as the allowance grows, dragging thousands more into very high marginal rates (the range will be £100-£120k by 2014).

Astonishingly, therefore, the Budget may even have increased more taxpayers’ marginal tax rates than it reduced. Incentives to work harder are going down, not improving, in Britain.
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