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Tax cut may not be as generous as it seems

Boris Johnson’s proposed tax cut for 40% tax payers may not be as generous for workers as it appears on face value.

“The current point at which someone pays 40% tax is £50,000. Under Boris Johnson’s proposal, this threshold would increase to £80,000,” said Nimesh Shah.

He added, “Boris Johnson has referred to ‘fiscal drag’ as his rationale to increase the present threshold. He wouldn’t be far wrong – in 2009/10 (the last tax year of the Labour Government), a person would need to earn over £43,875 before they paid income tax at 40% i.e. personal allowance of £6,475 plus the basic rate tax band of £37,400.

“Therefore, over the last ten years, the point at which someone pays 40% Income Tax has only increased by £6,125 (or just over £600 per year). If you were to factor in wage inflation during that ten year period, it is likely that more people have been dragged into 40% tax, despite the limit increasing to £50,000 more recently. This does not take into account the clawback of child benefit, which was introduced in 2013, which further reduced a family’s net take-home pay.”

In my view a more equitable proposal would be to remove the clawback of the personal allowance.

Nimesh said, “The exact detail of Boris Johnson’s proposal is not known, and one of the crucial aspects will be if the National Insurance threshold will align – assuming it did, people would pay 12% National Insurance on more of their earnings, which would mean the overall net benefit for workers would be considerably lower.”

He added, “Ignoring any changes to the National Insurance threshold, the benefit of increasing the higher rate threshold to £80,000 would be £6,000 per annum (or around £115 per week). If the National Insurance threshold were to align, that benefit would be reduced to £2,400 per annum (or around £46 per week). This would essentially mean that those that don’t pay National Insurance (pensioners and those who live-off their investment income) would be the main beneficiaries.

“In my view a more equitable proposal would be to remove the clawback of the personal allowance, whereby a person loses their tax-free allowance by £1 for every £2 of income earned over £100,000. This creates an effective rate of tax of 60% between £100,000 – £125,000. This has been a facet of the UK’s personal tax system for nearly ten years, and creates significant frustration for taxpayers as well as many considering it be totally unfair.

“Another consideration is whether the starting point for the additional rate of tax (45%) should increase beyond £150,000. This threshold has not increased since the introduction of the 50% tax rate in April 2010.”

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