The top rate of income tax in the UK may be dropping from 50% to 45% next year, but lower rate taxpayers are not so lucky. Almost a million people have been pushed into higher tax ba
The top rate of income tax in the UK may be dropping from 50% to 45% next year, but lower rate taxpayers are not so lucky. Almost a million people have been pushed into higher tax bands than previously, with over four million now caught in the higher rate tax trap.
HM Revenue & Customs (HMRC) data reveals that 3.8 million people are now paying tax at 40%, while 307,000 are paying the top rate of 50%. This means that 4.1 million are now paying the higher rates, an increase from 3.8 million last year.
917,000 people are paying a higher tax rate than they were three years ago. This represents an increase of around a third.
The government has consistently reduced the threshold for paying the 40% tax rate, snaring more people into this tax band. Fiscal drag – where tax bands do not increase in line with inflation ? has also contributed.
John Whiting, of the Chartered Institute of Taxation (CIOT) told the BBC: ?The combination of that happy couple, fiscal drag and cuts in the higher rate threshold, is pushing more people into the higher rates where they can contribute more to cutting the deficit.?
It will not stop here. The Treasury calculates there will be 630,000 more higher taxpayers next tax year, when the threshold for the 40% rate drops yet again. In 2010 the threshold was ?43,875. It has already been cut to ?42,475 and from April 2013 will be reduced to ?41,450.
In this case, the number of 40% taxpayers will have increased by almost 48% between the 2009-10 tax year and the 2014-15 one.
Mike Warburton, tax specialist at Grant Thornton, said the number of people paying higher taxes was an ?inevitable consequence? of the government?s tax policy. ?Higher-rate tax used to be paid only by the genuinely wealthy,? he said. ?It is now a rate paid by middle managers, teachers and middle-ranking NHS executives, none of whom would consider themselves to be wealthy by any means.?
After this year?s budget the Institute for Fiscal Studies (IFS) also said the higher rate tax trap is now hitting people with ?relatively modest? salaries.
It calculated that the budget will trap another 1.3 million taxpayers into paying 40% over two years, so that that number of higher-rate taxpayers will hit 5 million for the first time in 2014.
When the coalition party took office there were 3.1 million higher taxpayers; by March 2012 there were 3.7 million.
According to the IFS, in 1978 just 3% of taxpayers paid the higher rate of income tax. The number rose over the next 10 years, but only slightly to 5%. Today 12.5% pay tax at 40% and next year it will jump again to 15%.
IFS director, Paul Johnson, said the rapid rise was ?part of a long-term trend towards the encroachment of 40% income tax on a whole new type of worker.?
The controversial 50% tax rate was introduced by the previous Labour government in its 2009 austerity budget. It began being applied in April 2010 on income over ?150,000. It was meant to be a temporary measure. In this year?s budget the Chancellor announced that it will be reduced to 45% from April 2013, but gave no hint as to when the 45% rate will be abolished, if indeed at all.
However, in an interview he gave with the Daily Telegraph on 6th April, he said that he is ?very happy with the 45p rate of tax. We?ve got it to a good place where it?s competitive?. Business leaders disagree, describing it as ?uncompetitive? and ?damaging to growth?, but it looks like it may be around for some time.
The total number of taxpayers in the UK will actually drop this year, from 30.1 million to 29.7 million. This is because the personal allowance has increased for lower rate taxpayers, so more people are taken out of the tax net.
The government cannot afford to lose any tax revenue, so it is not surprising that it now has more people paying tax at 40% to compensate.
Taxes have been rising over much of Europe as part of austerity measures, whether through direct tax hikes or indirectly, for example by freezing thresholds and allowances. Some countries are targeting higher earners; in other countries everyone is paying more tax. In Spain for example tax rates have increased across the board, both for general income and savings tax.
We cannot do anything on some taxes like employment income and VAT, but you may be able to lower your liabilities on your savings, investments, capital and pensions. Although most people grumble about tax, surprisingly few take action to make sure they are paying the least amount possible. For example, in the UK Unbiased.co.uk?s latest annual Tax Action Report found that 85% of people fail to act on reducing their tax bill, with the result that ?12.6 billion will be ?gifted? to the taxman this year.
For advice on tax planning in both the UK and your country of residence contact an international tax advisory firm like Blevins Franks.
By Bill Blevins, Blevins Franks Financial Correspondent
3rd May 2012
The tax rates, scope and relief may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual must take personalised advice.