Why fix a load trap when you can throw it away?
The Chancellor offered himself a golden opportunity within the budget to solve the illogical mess our tax system has ended up in.
But after coming tantalizingly close to looking like he was going to hit the back of the net, Jeremy Hunt decided not to shoot on goal and instead passed the ball to the opposition.
And so, after what could well be the final budget before the election, the Conservative Chancellor has left us with marginal tax rates of 60 per cent that are not paid by the highest earners.
The Budget Box could have included a plan to remove tax traps, but went far beyond that
Raising the threshold for the abolition of child benefit was welcome news – as was the somewhat vague promise that child benefit would be assessed on the basis of household income from 2026 – but despite his rhetoric, Mr Hunt was shuffling deck chairs around.
In the run-up to the budget, there have been variations on a chart doing the rounds showing marginal tax rates as a result of the phasing out of child benefit and the abolition of the personal allowance.
The graph shows a line showing income tax and national insurance rates, which should rise as income rises. Income tax and NI together should go to 30 percent, 42 percent, 47 percent.
But instead, the abolition of the personal allowance between £100,000 and £125,140 provides a tax incentive, with income tax plus NI at 62 per cent.
Meanwhile, the abolition of child benefit will see a rise of between £50,000 and £60,000, with a parent with one child facing a rate of 54 per cent and a parent with two children facing 63 per cent.
Most of our readers will have seen the map, as we have published our version numerous times, and I am quite sure the Chancellor has too.
(I tweeted him earlier this week to bring it to his attention, just in case, but Mr. Hunt didn’t reply.)
Tax traps: The graph above shows the marginal tax rates for income tax and national insurance at the red line, with an increase of up to 62% between £100,000 and £125,000 due to the abolition of the personal allowance. The blue lines show the effect of the abolition of child benefit between €50,000 and €60,000
The Chancellor could have arranged for the abolition of child benefit, but instead moved it slightly higher on the income scale; this now starts at £60,000 instead of £50,000.
We will now end up with parents earning £60,000 to £80,000 losing more of their next pay rise to tax than someone earning £200,000.
This is no way to run a tax system.
People shouldn’t have to pay higher marginal rates than those who earn more than them – and where it’s obvious that parts of them do, you need to fix the problem.
Unfortunately, it looks like we will have to wait for a new, braver Chancellor to finally clean up the mess.
Where Mr Hunt was braver was another 2p cut to National Insurance. This brings the UK’s second income tax down to 8 cents on the basic rate, down from 12 cents it was a year ago.
Once people cross the higher rate threshold and start paying 40p tax above £50,270, the NI drops to 2p.
Yesterday’s move to National Insurance is welcome and while pensioners may not be happy about not getting a tax cut, it’s worth remembering that this is because they don’t have to pay NI yet.
Tax thresholds have barely changed in most cases over the past five years – and investors have seen capital gains taxes and dividend payout scaled back
Freezing thresholds is no longer a stealth tax; people know it’s happening
What was not so welcome was the continued freeze on tax thresholds.
At £12,570, the starting rate for basic tax has been stuck around that level for five years, while the higher tax threshold of £50,270 has also remained stuck. During that period we had to deal with inflation of 21 percent.
These tax freezes cost us a lot of money.
The Institute for Fiscal Studies says: “In total, for every £1 returned to workers (including the self-employed) through NIC cuts, £1.30 will be taken away as a result of threshold changes between 2021 and 2024.”
Jeremy Hunt’s problem is twofold: he doesn’t have enough firepower at his disposal to counter that pressure and it’s long since stopped being a stealth tax – people know it’s happening.
The Chancellor has also taken that tax problem off the table. I’m not sure if that was wise.
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