The Conservative party manifesto launched in the run-up to the last general election committed to raising the higher rate threshold so that no one earning less than £50,000 would pay the 40p rate. The stated intention was to remove around 800,000 people from the higher rate tax band which, the manifesto said, was ‘originally meant to capture only the wealthy’.
The higher rate now kicks in at £42,385 and will rise to £43,000 from next month. But reports in the weekend papers suggest that Mr Osborne may be planning to raise the threshold more quickly than planned thus taking him a step closer to his target of £50,000 by 2020.
Such a move would be an attempt to reverse the trend of ‘fiscal drag’ which has seen more people sucked into the 40p band over recent years. According to the latest government statistics, the numbers of people paying the higher rate has risen from 3.02m in 2010-11 to an estimated 4.65m in the current financial year.
Quite how far the Chancellor can afford to raise the threshold now that his plans to reform pensions tax relief have hit the buffers remains to be seen. However, demonstrating progress on delivering his manifesto commitments should play well with the party faithful at a time when he is looking to boost his leadership credentials. If the rise in the 40p threshold were to take effect from April this year, it would also provide a welcome bonus to middle income earners who he is hoping to woo in the lead up to the EU referendum.
Budget 2016 also provides the opportunity for the Chancellor to tackle two significant anomalies in the current system. Because the personal allowance tapers away by £1 for every £2 that a taxpayer's income exceeds £100,000, any income arising in the £100,000 to £121,200 bracket attracts an effective tax rate of 60 per cent. Many perceive this to be grossly unfair.
There are also calls for reforms to the child benefit regime. Effective income tax rates for a 40 per cent taxpayer with children, on income between £50,000 and £60,000, are 50.8 per cent (for those with one child) and 58.7 per cent (for those with two children). This is due to the withdrawal of child benefit where an individual's income exceeds £50,000. Addressing this issue could also play well with middle income parents.
If you would like to discuss any of these points further, please contact Gary Heynes or your usual RSM contact.