Tax break 'cliff edge' criticised

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Senior Hispanic couple paying bills

David Cameron's tax break for married couples has been heavily criticised by a respected economic think-tank because of a "cliff edge" which will leave some workers worse off if their pay rises.

The transferable tax allowance, worth up to £200 a year to basic rate taxpayers whose spouses do not work, comes into force next April, but the Institute for Fiscal Studies (IFS) said the way the policy was designed did not make sense and indicated a "lack of direction".

The measure was highlighted by IFS director Paul Johnson in an attack on the "complexity and uncertainty" in the tax system created by the Government and previous administrations.

Mr Johnson also attacked "pious" ministers claiming to be on the side of hard-working families while not increasing the threshold at which national insurance contributions (NICs) are paid, and said stamp duty - which has increased revenues as a result of rising rates and soaring property prices - was "one of the worst designed and most damaging of all taxes".

He warned that a worker benefiting from the transferable married tax allowance would face an "infinite" marginal tax rate if their pay took them into the higher-rate band.

Mr Johnson said: "This is because of the effect of the £1,050 transferable allowance for married couples, an allowance that will be withdrawn once higher-rate tax becomes payable.

"The effect is that the additional £1 of income that takes this person into higher-rate tax will result in an additional £210 tax bill.

"This amount may be relatively small, but it never makes sense to have this kind of thing in a tax schedule. Perhaps more importantly, it looks like an indication of a lack of direction.

"Introducing a transferable allowance for married couples is a substantive change to the tax system. It is a move back towards a degree of joint taxation. The amount that can be transferred is set at just £1,050 - worth £210 a year or £4 a week to the 30% or so of married couples set to gain.

"Introduction on such a modest scale may make sense to keep initial costs down. But introducing the transferable allowance in a way that will make it extremely hard to extend without making this cliff edge at the higher-rate threshold worryingly high smacks of a lack of long-term design."

The coalition Government's flagship income tax policy has been to raise the personal allowance to £10,000, with a further increase to £10,500 next April, lifting around three million low-paid workers out of the tax.

But the IFS said the point at which NICs become payable had "diverged substantially" from the income tax threshold and more than a million low-paid workers now pay NICs but not income tax.

"This is a direct reflection of the current Government's policy of raising the income tax personal allowance whilst leaving the point at which NICs become payable unchanged in real terms. It is hard to think of a
good reason for raising the one and not the other."

Mr Johnson said: "The pious statements of politicians that they are raising the personal allowance in order to help 'hard-working families' look less credible in the face of the clear fact that raising the NI primary threshold would be more effective in doing so."

He also highlighted other anomalies in the income tax system, including an effective 60p rate for those earning between £100,000 and £121,000 caused by the withdrawal of the personal allowance.

He said: "There is a basic rate of income tax of 20%, a higher rate of 40% and a top rate now of 45%.
What is less well known is that the last government introduced a rate of 60% on a band of income starting at £100,000.

"This Government has maintained it and effectively increased its range considerably. There is now a 60% rate of income tax on income between £100,000 and £121,000 (where it drops back to 40%). It's hard to make much sense of that."

The Government has come under pressure from senior Tories to prevent more people being caught by the 40p tax rate.

But Mr Johnson said: "Several elements of the income tax system no longer adjust with inflation. The point at which the 45p rate becomes payable, and indeed the point at which the 60p rate becomes payable, is fixed in cash terms and has already fallen by more than 12% relative to the Consumer Prices
Index since its introduction.

"More people will gradually be pulled into these higher rates. There is apparently no plan to stop this."

The IFS expects there to be 5.3 million higher and additional-rate taxpayers in 2015-16, up from 3.3 million in 2010-11.

The increase in property prices, and increases in the rate at which stamp duty is levied, have contributed to a rise in revenues from the tax.

But Mr Johnson said: "The last government and this one raised rates of stamp duty land tax time and time again. This is one of the worst designed and most damaging of all taxes, yet revenues from it are due to hit £15 billion within just a few years.

"At the extreme a £1 increase in sale price can now trigger an additional £40,000 tax bill. The tax helps to gum up the entire property market."

The IFS paper was produced as Mr Johnson delivered the annual Chartered Tax Adviser address.

He said: "Complexity, uncertainty and inefficiency in a tax system which takes £4 in every £10 generated in the economy costs a huge amount in lower welfare, less economic output and straightforward inequity.

"Even if we can't have perfection, something close to coherence and consistency would be nice."

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