Half of all additional income tax collected by the Government by 2021 will be paid by the top 1.5 per cent of earners as hundreds of thousands of people are dragged into paying the top rate, figures have shown. Just 469,000 people earning more than £150,000 a year will account for almost £20 billion of additional income tax paid to the Treasury, a record high according to the Office for Budget Responsibility (OBR).
Senior Conservative MPs on the Treasury select committee called on Philip Hammond, the Chancellor, to look again at the tax system in the wake of the figures and warned that the burden should be spread more widely. The number of people paying the additional 45 percent rate has increased from 0.75 percent in 2010 to 1.1 percent today and will rise further to 1.5 per cent in 2021 as a result of the threshold being frozen by successive Chancellors. More people will pay no tax at all on their income in 2021 than those who pay the top rate, OBR analysis has shown. But there are fears that additional rate taxpayers may choose to move their money into incorporated companies instead, in order to avoid higher tax bills.The OBR estimates the Government may lose more than £3 billion in tax it expects to bring in from those earning more than £150,000 a year because of such a shift.
Conservative MP Steve Baker, a member of the Treasury select committee, called for a “fundamental” rethink of what the state does and how it is paid for by taxation. He said: “It’s pretty obvious that we need to be careful to ensure the tax system is resilient and that means the burden of taxation is spread widely.“This is symptomatic of a profound crisis of political economy that not just the UK but much of the world faces. “Everywhere governments are struggling to fulfill promises that have been made and struggling to raise tax revenues to meet those promises and ultimately a range of places are resorting to highly expansionist monetary policy to cover the gap. This cannot go on.”
His colleague Jacob Rees-Mogg, also a member of the Treasury committee, added: “If you have very high tax rates then people inevitably take steps to limit the amount of tax they pay. “If you’re dependent on under 500,000 people that is a very narrow tax base and it indicates that rates at the top end have become too high and I think one of the things the Chancellor needs to look at is a fundamental overhaul of taxation.” The OBR also warned that the number of people paying the higher tax rate, of 40 per cent – around 4.6 million people in 2021 earning more than £49,000 – is set to rise much more slowly than it has in previous years. The number will increase by six per cent over the next four years, the analysis shows, compared to a 21 per cent increase in the previous five year period.
This could spell problems for the Chancellor as the Government has been used to large increases in the amount of tax paid by this group over the last few years. The Treasury expects to make an additional £40 billion in income tax contributions by 2021, according to projections in the Autumn Statement. Tax receipts in 2021 are set to total more than £213 billion compared with £173 billion in 2016.
The OBR analysis found: “Almost half of that growth is accounted for by additional rate taxpayers, the number of whom is forecast to rise from 329,000 in 2016-17 to 469,000 in 2021-22 (from 1.1 to 1.5 per cent of taxpayers). This reflects the fact that the additional rate threshold is frozen at £150,000 over the forecast while the income tax base grows by 4.3 per cent.”
But it warned that the body has been “underestimating” the impact of people changing their tax status to become incorporated companies in order to gain advantage under the tax system. It added: “We expect incorporations to increase by five percent a year on average over the forecast period, much faster than the 0.4 per cent a year rise in total employment… this takes around £3.5 billion off total receipts in 2021-22.”
This figure is in spite of corporation tax charged on companies by the Government, the OBR said in its analysis. Thomas Pope, research economist at the Institute for Fiscal Studies, said: “Relying more heavily on higher income taxpayers means that income tax receipts going forwards are more risky, depending especially on the growth of the highest incomes.“The Government would be well advised to increase thresholds in the income tax system, such as the additional rate threshold, in line with inflation, as most other thresholds are, rather than fixing them in cash terms.“Holding the £150,000 threshold fixed in cash terms is a major cause of the large forecast increase in the number of additional rate taxpayers.”
Ministers have focused tax hikes on those earning more after repeatedly increasing the personal allowance threshold for low earners, but increasing them at the top. George Osborne, the former Chancellor, made a virtue of the policy in a bid to rebrand the Conservatives as the party of low-paid workers.
He cut Labour’s 50p tax rate to 45p as part of a plan which he said raised more income for Treasury coffers, not less. Theresa May has also pledged to focus on those families that are just about managing and the Government has vowed not to seek further cuts to welfare over the Parliament.
Author – Kate McCann
Tags: Additional Rates, Autumn Statement, Further Cuts, Income Tax, OBR, Office for Budget Responsibility, Political Economy, Tax, Tax Hikes, Tax Income, Tax Rates, Tax Revenues, Tax Status, Tax System, Taxation, Taxpayers, Treasury Comittee