Millions to face tax agony after budget U-turns
MILLIONS of Britons now face paying effective tax rates of up to 65 per cent after Chancellor Jeremy Hunt’s emergency fiscal budget on Monday.
Hunt scrapped plans to cut basic rate income tax to 19 per cent. It will now stay at 20 per cent “indefinitely”, as will the additional 45 per cent tax rate.
Yet this is only the start of the agony, as the freeze on income tax allowances will stay in force until at least 2026, pushing millions into higher income tax bands as earnings rise, a process known as fiscal drag.
The UK tax system is horrendously complicated and many fail to realise exactly how much of their income they are handing over to HM Revenue & Customs.
That is before they pay other levies, such as VAT, capital gains tax and inheritance tax, with the tax burden at a 70-year high and set to stay there.
Tax specialist Andrew Marr, managing partner at Forbes Dawson, said Hunt’s U-turn on scrapping the corporation tax increase to 25 per cent and 1.25 per cent tax on dividends will hit small business owners particularly hard.
Under former Chancellor Kwasi Kwarteng’s abandoned plans, a business shareholder paying top-rate tax would have received £50 for every £100 of profit from April 1, 2023.
Now they will only receive £45 – giving a marginal tax rate of 55 per cent. “This U-turn has crossed the psychologically important 50 per cent threshold,” Marr said.
This is only the start of the pain, because Hunt’s warning that he will make “decisions of eye-watering difficulty” all but guarantees that many of the UK’s most punitive stealth taxes will persist.
A forgotten tax called high income child benefit, introduced in 2013, claws back child benefit where one parent earns more than £50,000.
It costs a family with two children nearly £2,000 a year, and that £50,000 threshold has not been increased for almost a decade.The marginal tax rate is a staggering 65 per cent.
This tax is unfair, because a working couple who earn, say, £40,000 each, escapess, despite having a higher total household income of £80,000.
Similarly, a tax that cuts the personal allowance by £1 for every £2 someone earns above £100,000 has been held at that level since 2010. This sets a 60 per cent marginal tax rate.
Under the pension lifetime allowance, savers hand over a punitive 55 per cent of their pot to HMRC, once it exceeds £1,073,100.
That has already caught out 1.6 million people and the number of victims will rise because the allowance has been cut from £1.8million, and frozen until at least 2026.
The impact of fiscal drag was relatively minor when inflation was close to the Bank of England’s 2 per cent target, but it is getting steadily worse, said Shaun Moore, Quilter’s tax and financial planning expert: “With inflation rising every month, the tax take is rising all the time.”