Jeremy Hunt’s tax traps are stopping Britain from working, says IFS

PARENTS are facing “insurmountable barriers” to work once they earn more than £100,000 forcing them to cut back working hours to keep hold of childcare perks, according to a new report.

The Tax Law Review Committee warned Jeremy Hunt’s myriad tax traps were destroying work incentives across the economy and keeping people on benefits.

The body, which was established by the Institute for Fiscal Studies (IFS), said the Chancellor’s decision to withdraw free and tax-free childcare from high-earners once they cross the £100,000 pay threshold meant a parent in London with three children earning £140,000 could be worse off than someone on £99,000.

People who earn six-figure sums also have their tax-free personal allowance clawed back by HMRC, which already leaves them facing marginal tax rates of 60pc on every extra £1 of income. The report described the distortions created by the sudden withdrawal of these benefits as “among the most severe you will ever see within a tax and benefit system,” adding: “It creates an insurmountable barrier, where any parent increasing their income over £100,000 finds their household to be much worse off.”

Bill Dodwell, the former head of the now disbanded Office for Tax Simplification said the responses to the high tax rates were damaging for the economy.

He said: “Some are just paying the tax and others are deliberately working less and therefore not taking their income over it.”

The report added that some of Britain’s lowest earners were also facing tax rates of almost 70pc on every extra £1 of income earned, keeping many in part-time jobs.

“It could be argued that this marginal cost is unacceptably high and it will act as a disincentive to employment,” the report said.

Mr Dodwell said people on benefits should be incentivised to work more hours without being penalised. The report warned that the current system was creating perverse incentives to shun work as it called for taxpayer-funded childcare to be made universal.

“A parent can be better off earning a lower amount and keeping child support than earning a higher amount,” it said.

“This acts as a deterrent to work and encourages other tax driven behavioural changes.”

The report also highlighted previous work by the IFS that showed the

Treasury’s stealth tax raid will push an increasing proportion of taxpayers into higher income tax bands.

The Chancellor is understood to be considering reforms to child benefit as part of a package of tax cuts in the spring Budget on March 6.

An HM Treasury spokesman said: “We’re already making the single biggest investment in childcare ever, expanding free hours to all eligible working parents with children over nine months and saving parents £6,500 per year on average.”