Lower tax threshold raised but Osborne indicates 50p tax rate will not survive
March 24, 2011
With a little bit of tinkering with the tax thresholds, the Chancellor has achieved a political juggling act. On the one hand, raising the lower tax threshold is a decent sop to the Liberal Democrats – it was one of the cornerstones of their election manifesto. Meanwhile he has signalled he hasn't forgotten the traditional wealthier Tory supporter by setting up a consultation to scrap the 50 per cent tax rate.
Mr Osborne announced that the latter was a "temporary measure". That's a clever move to keep his voters happy as the implication is that he will ease their pain as soon as he can. It also gives enough notice to the wealthy for them to "manipulate the timing of their income to their best advantage", as Tony Bernstein, senior tax partner at HW Fisher & Company put it.
What's likely is that the consultation period on the 50 per cent tax rate will last long enough to allow the Chancellor to get rid of the rate before the next election in a headline-grabbing and vote-chasing move.
That's not to suggest that Mr Osborne's tax threshold changes are pure political posturing. In fact scrapping the 50 per cent tax rate could make economic sense, according to Richard Jordan, of specialist law firm Thomas Eggar. He said the introduction of the rate was a political gesture by the previous government.
"Alistair Darling conceded that no science or calculation had been carried out prior to arbitrarily choosing the figure of 50 per cent," Mr Jordan said. "This was the tipping point as the higher-end tax payer moved to a mind set where they were working more for the government than for themselves.
"The Government knows that the path to growth is to cut the tax rate again, but politically the environment is not right. I suspect the tax take has fallen and that this is, and always was, a political gesture rather than a sensible economic one," said Mr Jordan.
Looking more closely at the detail of the changes, the headline is that the tax-free personal allowance for under-65s will increase by £630 to £8,105 in April 2012. That's on top of the already-announced £1,000 increase in the allowance to £7,475 from 6 April this year.
The Government's aim is for those earning £10,000 or less a year to be exempt from paying income tax altogether by the end of the current Parliament. But that doesn't necessarily mean, that the raising of the threshold will benefit all that many.
The Treasury claimed the move was good news as next year's allowance change will reduce the tax paid by 25m people by an average of £48, while some 260,000 people on low incomes would be taken out of the tax net altogether. The Chancellor also said that the Budget would not draw more middle earners into the higher-rate band.
But around 750,000 middle earners are already due to pay 40 per cent tax for the first time from April as a result of fiscal drag. At the same time they're facing the burden of the already-announced one percentage point increase in National Insurance contributions.
Meanwhile, in a rather sneaky move, the Chancellor said the default measure for increasing direct tax thresholds and bands will be the Consumer Prices Index (CPI) from 2012, rather than the higher Retail Prices Index (RPI). The switch could mean all paying more into the Treasury coffers as they are drawn into higher tax bands.
"The linking of personal tax rates and thresholds to CPI rather than RPI from 6 April 2012 could result in a reduction in the real value of allowances and tax thresholds for everyone in the future," warned Greg Limb, partner at accountants KPMG.
CASE STUDIES...
'Osborne seems to be targeting the right people'
Jeff Romeo is a public relations consultant and lives in West London with his wife Romanee Romeo and their children John, three, and Lilla, one.
Income £60,000
Savings Some, but looking to become first-time buyers
Mortgage(s) None
Car expenses None
"Lowering or even slowing the rise in the price of fuel will be a great help for my wife and I. We got rid of our car a while ago because it was just too expensive but we are planning to move out of London, meaning we would need to get one again.
"If George Osborne delivers on his promise to crack down on tax avoiders, I will be pleased. You shouldn't be able to call yourself British if you don't pay taxes in this country, whoever you are. These people should be paying the most tax of anybody, not avoiding it. I find tax avoidance disgusting.
"I have dual citizenship so I pay here and in the States, which is fair.
"A lot of people will be pleasantly surprised by what has been announced, the Chancellor has done relatively well.
"Some were expecting this budget to really hurt but he seems to be targeting the right people."
'None of this is tackling the real problems'
Elizabeth Barnes, 23, works at a florist and lives with her four-year-old son Josh in Maidenhead.
Income £22,000 pa
Outgoings rent of £1,000 month, plus childcare costs
"Osborne is quibbling with little gifts here and there but none of it is enough to tackle the real problem. I drive a lot, so, yes, any freeze or reduction in the price of fuel will help but it is small fry when we are in such a huge amount of debt; the Government is just going for votes.
"I don't think there will be a big enough effect on enough people. My largest expenses are on rent and childcare, neither of which are greatly affected by the Budget. The only potential positive is the shared equity scheme to help first-time buyers. If I could afford to get a foot on the property ladder, I would be able to avoid paying extortionate rent.
"They are right to put up the prices of tobacco. Even as a smoker – or at least as one who knows she shouldn't do it – I would like to see more people encouraged to give up. I would like to give up cigarettes myself and hope this will act as a spur."
'They give with one hand and take with the other'
Pat Ankrah, 53, lives in Manchester. She is employed as a social worker and has four children, three of whom live independently.
Income £30,000
Savings Some but not significant, bought a house in France instead
Mortgage Yes
Car expenses One car, used every day for work
"The changes to the fuel charges seem excellent to me. Due to my job, driving costs me around £50-a-week, so this could make a real difference to my living costs.
"In my job at a hospital I see the effects of alcohol on youngsters every day.
"The freeze on council tax sounds good but at the end of the day, it all depends on how much we are going to get in our pocket after all of this.
"I never feel very positive about these changes as I think the government just gives with one hand and takes with another.
"I'm sure there will be cost increases in other places even as there seems now to be reductions."