Fiscal drag

It\’s been going on for years:

Grant Thornton, the accountancy firm, says that if wages increase at the rate predicted by government economists there will be a record 5.5 million higher rate taxpayers by 2015.

Even if wages grow at a more conservative 2.5 per cent, more than 700,000 people will become higher or additional rate taxpayers in the same period.

At present, anyone earning more than £42,475 pays higher rate tax at 40 per cent, while those earning more than £150,000 pay additional rate tax at 50 per cent. The Chancellor announced a three-year freeze on tax thresholds last June. Mike Warburton, senior tax adviser at Grant Thornton, said the freeze, coupled with wage growth, would create twice as many higher rate taxpayers by 2015 as there were in 1997. \”Lots of people who would not consider themselves rich are already paying higher rate tax and this is set to continue,\” he said.

Decades in fact. It\’s how we\’ve ended up with people on minimum wage paying income tax when a generation ago you needed to be making median wages to owe any.

3 comments on “Fiscal drag

  1. Indeed, I have a suspicion that the 1999 budget decision to increase the personal allowance to GBP 4195 and the width of the 20% band to GBP 4300 for the last financial year before the initial rate of income tax was cut from 20% to 10% was a Treasury in-joke in that it kept the sum (GBP 8495) just under the GBP 8500 threshold (left unindexed since the 1970s) at which a “higher paid employee” becomes liable to tax on benefits in kind.

  2. A make work scheme for civil servants!
    What the hell is the point of redistributive taxation that has a starting point for income tax below the median (equivalised) wage?
    Why do we now pay a higher rate of tax on earned income than investment income? Under a *Labour* government we got to the stage where the workers paid over 50% more tax (including NI which is now just a tax with no relation to benefits unless you’re a young NEET) on their earnings than the rich paid on the income from their rents or investments.
    As a paid-up member of the Conservative & Unionist party since I was 17, I spent a decade attacking many of Gordon Brown’s fiscal policies from the left.

  3. But has the tax-free allowance gone down in real terms? If not then it means people of the same income are paying tax, their position in the distribution seems less relevant.

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