2 million more people face 40p tax


Budget 2014

George Osborne's Budget smoke and mirrors did an impressive job this week, because while the nation poured over his pension proposals and weighed up the future for savings, he quietly dragged yet more people into paying higher-rate tax. The Institute for Fiscal Studies say that during his time with the red box, two million more people have started paying tax at 40%.

Pressure is growing for this to change, but will it take effect?

The Budget

There were calls for Osborne to scrap the 40p tax rate before the Budget, or at the very least move the threshold so it could catch up with wage inflation and stop more people drifting into the band. Instead Osborne had nothing new to offer.

In April the band will increase slightly, but nothing like far enough to undo the gradual shift of the years under Osborne. From that point the band will increase by just 1% for the next two years - which is clearly going to be a long way behind wage inflation - pushing even more people into this tax bracket.

The figures

The IFS calculated that in 2010/11 there were three million people paying higher-rate tax: by 2015/16 there will be almost five million people in this position. In the next two years alone the number of people falling into the band will rise 550,000.

Will it change?

Before the Budget, pressure was starting to build for something to be done about higher-rate taxes - with former Conservative Chancellors Lord Lamont and Lord Lawson calling for the rate to be scrapped altogether.

However, there are also plenty of reasons for things to stay exactly as they are. It is one of the measures that has given Osborne money to play with at each Budget, and it stands to be a nice little earner for some time to come. This has all been done without him ever having to announce a tax increase, so it's asking a lot to expect him to give this up.

Elsewhere in the political spectrum, Nick Clegg is keen to highlight that those who have been dragged into paying more tax are still better off overall, because of the changes to the Personal Allowance - the point at which people start paying tax.

By the time that the Personal Allowance rises to £10,000 in April 2015, everyone earning under £100,000 will be better off than they would have been before the Personal Allowance started moving - regardless of whether or not they are paying a higher marginal rate than they once were on the top slice of their earnings.

It seems, therefore, that this government can contain the pressure to do anything drastic with the 40% tax band. For what happens after the next general election we will have to wait for the manifestos to be published and the winner to emerge.