Ministers hit middle class with a double whammy

The coalition decision to lower the threshold at which people start paying income tax at the higher rate from £43,875 to £42,475 from Wednesday will leave an extra 41,000 people in the region paying 40 per cent tax on some of their earnings according to new figures released by the Government.

With soaring food and fuel prices, increases to National Insurance and the withdrawal of tax credits from families earning over £40,000, the move – introduced to pay for taking 900,000 of the lowest paid out of paying any income tax at all – will leave the middle classes facing a painful squeeze.

Those affected who have children will face a further blow in 2013 because becoming a higher rate taxpayer means they will also be stripped of their child benefit, costing them more than £1,000 a year if they have one child.

And with last month’s Budget setting out a freeze in the higher rate threshold next year – rather than increasing in line with inflation – thousands more who have just avoided being hit this time are likely to be dragged into paying 40 per cent tax from next April simply if they are given a cost-of-living pay rise.

Shadow Chancellor Ed Balls, MP for Morley and Outwood, said: “Thousands of families on middle incomes across Yorkshire are facing a double-whammy from the Conservative-led government’s stealthy tax rise.

“Not only do George Osborne’s Budget changes mean 41,000 people in our region will this week start paying tax at the 40p higher rate, but if they’ve got children they’re also set to lose all their child benefit in 2013 too. For a family with three children that’s almost £2,500 lost in child benefit alone.

“George Osborne says we’re all in this together, but he’s giving the banks a tax cut this year while families with children on low and middle incomes are being hit hard.

“The Government also says they’re reducing income tax a little for those on lower incomes, but they’re just giving with one hand while taking lots more away with the other.

“The Treasury’s own figures show that a family with children will pay an extra £450 more on average each year because of the Tory VAT rise. And that’s before their cuts to tax credits, cuts to childcare support and a three-year child benefit freeze.”

The figures are the first time the Government has revealed how many people in Yorkshire will be affected by a decision made in last year’s Budget but which only comes into effect on Wednesday, the start of the tax year. Across the country, 600,000 more people will start paying higher rate tax.

The level at which people start paying 40 per cent tax is being lowered to finance a £1,000 increase in the income tax personal allowance – the amount you can earn before tax applies – to £7,475.

Championed by the Liberal Democrats – who want the personal allowance raised to £10,000 by the next election – it will take about 900,000 people out of the tax net altogether and represents a £200 a year cut for a basic-rate taxpayer.

This year’s Budget announced the personal allowance will rise again next April to £8,085, giving a further £45 boost to basic rate taxpayers. Ministers decided against reducing the higher rate tax threshold, but the decision to freeze it will mean thousands more are dragged into it if their pay increases in line with inflation. Those dragged into the higher rate will still pay 20 per cent tax on earnings between £7,475 and £42,475, and 40 per cent on anything above that.

Jonathan Griffin, partner at Grant Thornton in Yorkshire, said: “The reduction in the higher rate threshold will seem like yet another squeeze on many middle England citizens who do not feel wealthy and were not to blame for the financial crisis. For those with children who are now in the higher rate tax bracket the pain will be all the greater when in 2013 they lose child benefit because of this.

“It is worth noting that much effort is being put into making the UK an attractive place to invest with a clear plan to reduce corporation tax rates. However the increasing tax burden on individuals seems at odds with this, it will be executives who will be taxed at the 50 per cent rate making the decision to enter and many of their middle managers will be hit by this lower higher rate threshold potentially driving up wage demands. If we want a low tax regime it is not enough to just lower corporation tax.”

But a Treasury spokesperson said: ““The Government’s priority is to deal with the unsustainable deficit. This has meant making tough choices, but the Government has always been clear that those with the broadest shoulders should carry the greatest burden. As well as reducing the higher rate threshold, the Government reduced the National Insurance Upper Earnings and Profit limits. This means that the majority of higher rate taxpayers will pay the same amount of tax and NICs as they would have otherwise.”