Labour ‘would drag 1.5m more into 40p tax bracket’

AN EXTRA 1.5 million middle income workers would be dragged into paying 40p tax for the first time because of Labour’s refusal to raise the threshold in line with wages, independent experts said yesterday.

The number of people paying the 40p tax rate – which this year kicks in when income reaches £42,385 – has already risen from 3.2million in 2010 to 4.9million today.

But the Institute for Fiscal Studies warned that if the threshold only rises in line with inflation, as Labour has proposed, the number of higher rate taxpayers will jump by another 1.5million to nearly 6.5million by 2021.

The Tories are pledging to increase the threshold by an accelerated rate – to £50,000 by 2020 – to take people out of the higher rate tax band. Even this will not keep pace with a predicted rise in earnings, resulting in a further 300,000 people being dragged in.

But many more could be hammered by higher taxes under Labour and the Liberal Democrats, the IFS said. In a major pre-election report yesterday, the IFS also warned of a black hole at the heart of Labour’s tax plans. It said its flagship policy to reinstate the 50p top tax rate would yield only £100million, not the £3billion claimed.

It also placed a big question mark over Labour’s boast that it can raise £7.5billion by clamping down on tax avoidance, saying the number appeared to have been ‘plucked out of thin air’. The IFS report criticised all three parties for publishing ‘opaque’ tax plans, for exaggerating the likely proceeds from tax avoidance and for ‘pretending’ that tax revenues can be increased without hitting ordinary workers. Director Paul Johnson said it was ‘not sensible’ to rely on income from tackling tax avoidance, as it was impossible to say how much would be raised. All the main

parties were also criticised for continuing to raid the pensions of the better off. Mr Johnson said the continual chipping away of tax allowances ‘creates worries’ about whether the pension system will survive in its current form.

But in difficult reading for Labour, a stream of their key policies came under scrutiny. The IFS also said:

Labour’s plan to reintroduce a 10p tax rate for low earners would be worth just 50p a week to recipients;

People living in homes worth more than £3million would have to be billed an eye-watering £16,000 a year to make the sums add up on Labour’s flagship Mansion Tax;

The party’s pledge to abolish stamp duty on starter homes worth up to £300,000 would probably drive up house prices. Mr Miliband has repeatedly claimed the parlous state of Britain’s public finances means Labour will have to make ‘tough choices’ on welfare. But the only published plans are scrapping the winter fuel allowance for the better off, which the IFS said would raise a ‘trifling’ £100 million, and capping child benefit rises for two years.

The IFS described Labour’s claims on child benefit as ‘bizarre and misleading’. Ministers have already capped child benefit at 1 per cent for the coming year, and inflation forecasts suggest it will rise by less than 1 per cent the following year. IFS analyst Robert Joyce said the result was that Labour’s pledge would raise ‘literally nothing’.

Labour last night defended its plans. Shadow Chancellor Ed Balls admitted proceeds from the 50p tax rate might be less than the £3billion claimed, but insisted the move was worthwhile.

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