Research has shown that even people of “relatively modest salaries” will be dragged into higher rate tax as a result of this week’s Budget.
The Institute for Fiscal Studies (IFS) has predicted that as many as five million people could be paying higher rate tax, at 40%, by 2014; by contrast last year 3.7 million people paid tax at the upper rates.
In the Budget George Osborne also announced the end of age related allowances for those people over 65. The IFS said the “granny tax”, as it has quickly been dubbed, would cost pensioners approximately 0.25% of the annual income in 2014.
However, the IFS went on to say that families on lower incomes would benefit from the changes introduced in the Budget.
Paul Johnson, Director of the IFS, said: “This is part of a long-term trend towards the encroachment of 40% income tax onto people earning above-average but relatively modest salaries.”
He continued: “It would be useful to know if the chancellor has a view as to what proportion of taxpayers should be paying at the higher rate.”
Higher rate tax bands
From the start of the new tax year on 6th April, people with taxable earnings of £34,371 and above, will pay higher rate tax. This figure has fallen steadily over the past couple of years, dragging more people into the higher rate tax band.
Partly as a result of these changes the percentage of tax payers who are paying the higher rate has risen significantly over the past two decades. At the end of the 1980’s only 5% of people paid higher rate tax, the IFS predict that this figure will rise to 15% next year.
50p tax rate
The cut in the 50p tax rate to 45p from April 2013 has also sparked significant debate, including comment from the IFS.
George Osborne believes that reducing the rate will actually increase the tax take as people will take less measures to avoid paying the new lower rate.
However the IFS are more cautious, Paul Johnson again: “We do not know with anything like such certainty that the cut in the 50p rate will cost only £100m.”