Unbalanced taxation penalises success

The new tax year begins on Saturday, though there is little cause for rejoicing. The country is still enduring the highest tax burden for 70 years, despite recent cuts in National Insurance. Figures produced by the House of Commons Library indicate that up to 1.6 million more pensioners will be drawn into paying income tax within four years because of frozen allowances.

The point at which people pay income tax is currently £12,570 and will be frozen until the end of 2028. Without the freeze, the allowance would be £15,220 this year. Currently, 8.5 million pensioners pay income tax but by 2028 this will rise to as many as 9.3 million people aged over 66. In 2010, when the Conservatives came to power, 4.9 million paid income tax.

To an extent, this is a function of more pensioners and higher pensions, which were pushed up through the “triple lock” by 8.5 per cent this year. But there is undoubtedly a so-called “stealth” effect, where more people are dragged into income tax or higher rates.

This is a deliberate policy to boost revenues without the political difficulties of increasing headline rates – though people can see what is happening by looking at their take-home pay. Moreover, the recent cuts in National Insurance contributions (NICS) made no difference to pensioners as they do not pay NICS.

It is all part of a redistribution of money through the tax system which the Government has engineered but seems reluctant to acknowledge. Paul Johnson, director of the Institute for Fiscal Studies (IFS), has observed that direct taxes paid by the average earner are now at their lowest level for more than 50 years. Someone on £35,000 is now paying £2,000 less in income tax and National Insurance than in 2010, while someone on £50,000 is paying £1,000 less.

How does this square with the “record tax burden” narrative? This is because the better-off are being hit harder than ever in order to sustain public services in an economy with no growth. Twenty-five years ago, the top one per cent of earners paid around a fifth of all income tax; now they pay about one third. The richest 10 per cent of the population pay 60 per cent of all income tax.

We desperately need growth to produce the revenues to meet endless demands for more public spending, yet the people in the engine room of the economy are increasingly prevailed upon to stump up more. For them, it is not a happy new tax year.