600,000 will now escape 40p band
Middle income workers to be £400 better off every year
ALMOST 600,000 middle earners will be lifted out of the 40p rate of income tax, the Chancellor announced yesterday.
From April next year, workers will only pay higher-rate tax when their incomes reached £45,000, up from the current £42,385 threshold today.
The move will hand an average £400 tax cut to hundreds of thousands of families, and George Osborne described the move as the biggest giveaway to higher-rate taxpayers since the 40p rate was introduced nearly 30 years ago.
‘It is going to lift over half a million people who should never have been paying the higher rate out of that higher tax band altogether,’ Mr Osborne said.
Just over 1.6million workers have been dragged into the 40p tax band since 2010, including teachers, nurses and train drivers. The total number paying higher-rate tax, which was originally supposed to be only for the wealthy, has hit 4.6million.
They have been dragged into the band because the Government has failed to increase the higher-rate threshold in line with rising wages.
The Government had already announced that the 40p threshold would rise to £43,000 next month. Experts said the faster jump to £45,000 showed the Chancellor was committed to his goal of increasing the 40p threshold to £50,000 by 2020.
The new threshold will slash the number of higher rate taxpayers by 585,000. It will cost the Government £2.1billion by 2021, according to Treasury figures.
Danny Cox, at investment firm Hargreaves Lansdown, said: ‘This is a really good news for millions of middle class workers. We’ve seen more and more people paying higher rate tax who were never the intended target originally.’
Iain McCluskey, of PWC, said: ‘This will be a welcome tax cut for many taxpayers. The 40p band has failed to rise in line with inflation for many years, dragging many more taxpayers into the higher rate. The Chancellor has made good progress in this budget as he drives towards a £50,000 limit by 2020.’
Harry Fairhead, of the TaxPayers’ Alliance, said: ‘People on middle incomes will be relieved at the rise in the higher income tax rate threshold as it leaves more money in their pockets and not in the hands of the often wasteful public sector.
‘There is clearly further to go as so many more people the higher rate now than in 2010.’ The 40p rate was introduced by the then chancellor Nigel Lawson in 1988 when he cut the top rate of tax from 60p. When the rate was introduced it was supposed to hit only high earners.
At the time only one in 15 were caught by the 40p rate. Now that figure is almost one in six – many on modest incomes. Approximately one in ten nurses is trapped in the higher rate band.
But David Finch, of the Resolu- tion Foundation, said: ‘ These income tax cuts will largely benefit higher income households. That is hard to justify at a time major fiscal pressure.’
Frances O’Grady, TUC general secretary, said: ‘ Most working families earn too little to benefit from this. They will wonder why the Government can spare so much for a tax handout to higher earners when they are losing children’s centres and facing longer hospital queues.’