£350 boost for the middle class as 40p tax threshold raised

‘Tories deliver their promises’

MIDDLE- class taxpayers will be more than £350 better off as a result of changes to the 40p tax threshold announced yesterday.

The Chancellor told the House of Commons his changes would mean 130,000 people would be taken out of the higher rate altogether.

But George Osborne was accused of ‘moving too slowly’ after it emerged the starting point for paying the tax will still be below its 2010 level in three years’ time.

Yesterday the Chancellor insisted he was making a ‘strong start’ to moving towards his pledge of moving the 40p threshold to £50,000 by 2020. He announced the threshold would rise from its current level of £42,385 to £ 43,000 in 2016/ 17 and £ 43,600 in 2017/18.

If Mr Osborne had decided to increase the 40p threshold in even steps towards his £50,000 target it would have meant a £ 1,700 increase every year for five years.

But by holding back much of the increase for later years he will have to increase the threshold by a hefty £6,400 over the final two years of this Parlia- ment to reach the £50,000 goal. At the same time, the personal allowance – the amount you must earn before you pay any tax – will go from £10,600 this year to £11,000 in 2016/17 and £11,200 in 2017/18.

It is set to reach £12,500 within the next five years – meaning no-one working 30 hours on the minimum wage will pay income tax.

Mr Osborne said the tax threshold increases were the ‘priorities in this Budget’ as they had been the Tory priorities during the election campaign. Declaring that the Tories ‘deliver what we promise’, he said the changes were a ‘ down payment for a country on the up’.

But the 40p threshold is still below the level it was in 2010/11 when it stood at £43,875. Then, some three million people were paying the higher rate. By this year that figure had increased to 4.65million – meaning 1.6million more were dragged into paying the 40p rate.

Overall, a higher-rate taxpayer will receive an effective tax cut of £203 next year and £160 more the following year, according to calculations by EY.

Basic-rate taxpayers will be £80 better off next year and £40 the following year.

Stephen Herring, head of taxation at the Institute of Directors, welcomed the change, but added: ‘Osborne is moving too slowly on tax thresholds, allowing more middle- earners to be dragged into the 40p rate.

‘The increase in the higher-rate threshold announced by the Chancellor for next year does not even keep track with wage growth, meaning even more people will be dragged in.

Mr Osborne is intending to pass a law so that the personal allowance increases in line with the minimum wage to keep those on low incomes out of income tax.

But Mr Herring called for a ‘ triple lock’ for higher- tax thresholds similar to that for pensions so they rise by inflation, earnings or 2.5 per cent – whichever is higher.

David Kilshaw, EY’s head of private client tax, said Mr Osborne was ‘keeping some gas in the tank for accelerating later.’ He added: ‘ The Chancellor clearly wants to boost people’s pay packets, but it is a very small post-election thank you.’

He said the tax savings resulting from changes to the personal allowance were ‘nothing to write home about’.