The industry has broadly welcomed prime minister David Cameron’s income tax changes, although questions have been raised about how the Treasury will afford to carry them out.
Yesterday, speaking at the Conservative Party Conference, Mr Cameron promised to increase the 40p tax band threshold from £41,900 to £50,000 if elected in the next Parliament, while at the same time increasing the personal allowance from £10,500 to £12,500.
Lucy Brennan, partner in the private wealth group at Saffery Champness, pointed out that the growth in those paying at the higher rate has become a top campaigning cause for the Conservative back-benchers, so with an election looming it is no surprise the issue has been tackled head on.
“Previous increases in the personal allowance have been funded pushing more taxpayers into the higher rate band deliberately. Now, with a large increase in the higher rate proposed at the same time, we have to wonder whether Cameron is stretching the bounds of possibility or whether there will be a countering adjustment elsewhere to fill the tax gap.”
Danny Cox, head of financial planning at Hargreaves Lansdown, noted that given the pledge only has to be delivered by 2020, this means the promise may not be as open-handed as it might at first appear, once inflation and rises in earnings are taken into account.
“Governments are well-practiced in producing fiscal drag, raising tax thresholds by less than the rate at which wages are rising, thereby pushing more people into higher tax bands while appearing generous at the same time.”
Mr Cameron’s promise implies an average annual increase of 3 per cent a year between now and 2020, with Mr Cox suggesting that as wage increases and inflation are weak at the moment, a £50,000 threshold looks very attractive.
“However should earnings growth return to more normal levels, the rise to £50,000 may simply reflect increases in the general level of earnings in the economy, rather than significantly cutting the number of higher rate taxpayers. That said, one shouldn’t bite the hand that feeds you, and a rise to £50,000 is certainly preferable for taxpayers than the threshold staying where it is, or indeed falling further.”
Mr Cox also mentioned that the speech raised questions about what happens with national insurance contributions, which he deemed “horribly complicated and, with the exception of the upper earnings threshold, out of kilter with income tax rates”.
He suggested that simplification and a potential merger of the two taxes has been trailed, so maybe now some action will be taken. “We have already seen means testing of child benefit at £50,000 and we could see further reductions in universal benefits such as winter fuel payments at this level.”
Sam Bowman, research director of the Adam Smith Institute, added that national insurance contributions are not affected by this threshold rise.
“Raising that threshold and pegging the new NI and income tax thresholds to the minimum wage rate should be the next government’s top priority to beat the scourge of low pay once and for all.”
Frances O’Grady, general secretary of the Trades Union Congress, predictably came out in opposition to Mr Cameron’s announcements, arguing that if he were the leader of a trade union “he would be thrashed in his next election for delivering the longest and deepest living standards cut in living memory”.
He added: “And the policies announced this week will make things worse. The chancellor promised to take cash from the working poor to pay for tax breaks for the richest pensioners.
“And the Prime Minister’s tax plan is all about help for the better off. Raising the personal allowance and the higher rate tax threshold both help those well above poverty levels. Many minimum wage workers already pay no income tax and even those that do are likely to lose more from benefit changes and from continuing to pay higher Vat.
“No amount of dressing up can hide the fact that the policies in this speech pass by those who need the most help to reward richer voters.”
