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Budget 2014: Is it time to raise the 40p income tax threshold?

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The politics of austerity have given way to the politics of recovery quicker than anyone expected last year.

The economy has picked up spectacularly with the Bank of England predicting 3.4 per cent growth this year.

Despite an enormous deficit – estimated at 5.6 per cent or £96bn this year which will not be paid off until 2018 – MPs have quickly turned their attention to giveaways instead of cuts.

The key Treasury debate ahead of tomorrow’s Budget has been who to cut taxes for – middle earners or the low paid?

On one side, the Liberal Democrats want to increase the income tax personal allowance further to £10,500 by April 2015, backed by senior Tories.

It is the Lib Dem’s most popular policy by a country mile but it has been partly funded by dragging more people into the 40p tax band with below-inflation rises to the threshold.

Around 1.4 million extra people have drifted into paying the 40p tax this parliament meaning 4.4 million individuals currently earn more than £41,450 and pay the rate, compared to just 1.35 million when it was introduced in 1988.

Middle earners have also faced years of falling wages in real terms and cuts to child benefit.

This shift has created a powerful coalition calling for some relief for middle earners by raising the 40p threshold to £45,000 or even as high as £50,000.

The campaign has the support of two former Tory Chancellors, the influential Free Enterprise Group of 40 Tory MPs, the Institute of Directors and Ukip who are all calling for the 40p tax band to be increased.

But the Chancellor looks set to resist the calls to change tack and instead back further rises to the personal allowance.

There are other tax cutting options other than raising the 40p threshold or the personal allowance. Thinktanks Resolution and Centre Forum have criticised further personal allowance rises as they do not help the poorest earning less than £10,000.

Backed by former Lib Dem Treasury spokesman Lord Matthew Oakeshott, the think tanks would rather see the national insurance personal allowance rise from its £5,668 base. The Tories are also reportedly considering an increase to the NI allowance in their manifesto.

But that’s for the next future. Tomorrow, the Treasury’s tax cuts are likely to be modest and focused on those earning between £10,000 and £40,000.

The Budget will attempt to help middle earners in other ways with more childcare support and an extended Help to Buy scheme but will it be enough to buy them off?

It is worth remembering George Osborne cut income tax for those earning more than £150,000 from 50p to 45p in March 2012.

With wages still falling in real terms and a powerful coalition circling Osborne, Labour leader Ed Miliband would be well advised to once again make himself champion of the “squeezed middle” tomorrow.

Samuel Dale is politics reporter at Money Marketing – you can follow him on Twitter here

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. The government is all too ready to crow about how raising the Personal Allowance has resulted in lots of people having to pay less income tax but what they don’t want anyone to talk about is how yanking down the 40% threshold has resulted in lots more people having now to pay a whole lot more tax. As someone on middle income and feeling distinctly squeezed, I think the government jolly well should raise the 40% threshold.

  2. From the way people are reacting, you;d think moving into the 40% tax band meant you paid 40% on every penny you earned. A similar sort of sleight of hand is also tried with IHT, where the threshold is often overlooked and we’re all supposed to feel sorry for people paying 40% IHT, seemingly on every penny they inherit.

    We’re all feeling squeezed, it’s just that someone on £40k plus can copy with the squeeze better than someone on a zero hours contract earning less than £15k a year.

  3. matthew Hewitson 19th March 2014 at 2:07 pm

    FYI: 40% on annual earnings from is currently £31,866 to £150,000

  4. Correct! So someone earning £31867 (without any annual allowance) will only be paying 40% on £1 -rather than the whole £31,866 that you’d think they would be, judging by the media and commentator reaction.

    And £31,867 is still a long way over the national average wage

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