In the Tory leadership contest, Boris came out with a proposal to raise the Basic Rate Tax threshold to £80,000 (currently it is £50,000).

This seemed like an outrageous and impractical proposition. At the time, some commentators saw it as an example of dead cat bounce. Boris was having girlfriend trouble (wasn’t it decent of their next door neighbours to show their concern by doing what we would all do, calling the police and then The Guardian newspaper. Well perhaps not the second step but they were socialist supporters).

This was the brainchild of Boris’s election guru, Sir Lynton Crosby to try and neutralise a bad story with a preposterous headline grabber. The actual content of the headline grabber, ie this tax pledge, is then quickly forgotten.

Not so in this case as Boris has repeated the pledge.

When one looks at it in more detail, there will of course be no commitment as to when this uplift will actually be implemented. It will be likely introduced over a good number of years, like Mr Osborne’s pledge to lift the IHT lifetime allowance to £1million. That may nearly be in place but certainly not in the form that one might have anticipated when it was announced. Indeed there is something of a Nostradamus prophecy in these pronouncements. The basic rate band will inevitably extend to £80,000, if you give it long enough.

At least you know where you are if the Marxists win the next Election and John McDonnell becomes Chancellor. He is not going to shilly shally around. The higher tax rates and lower tax thresholds will be introduced straightaway.

I personally found Boris’s announcement extremely unhelpful. I feel that both he and Mr McDonnell are missing the point. The debate should be around the points where we have a unreasonably high marginal rate of tax operating. The focus should be on the £50,000 income level.

The majority of the population will have little sympathy with people earning £80,000 a year, perceiving them as being comfortably off and they might well be right. They might perhaps (in some parts of the country) take the same view about someone on £50,000 a year.

Let’s consider what might be a reasonably typical family in the South East. There is one breadwinner who is at work. The other partner is at home looking after two young children. The breadwinner is on £50,000 a year but has a student loan to contend with as well as a mortgage. The breadwinner then gets good news by way of a pay rise. Unfortunately the Income Tax rate goes up from 20% to 40%. In addition, the income is subject to a 9% deduction in respect of the student loan repayment. There is then the abatement of Child Benefit, £1 being stripped away for every £2 of income above £50,000.  By way of some relief, the employee’s National Insurance Contribution does reduce from 12% to 2%.

By my rough calculations, that element of the pay rise taking total income above £50,000 suffers a marginal rate of tax of 69%. Up to £50,000 it would have been 41%.

I still feel as well that the £100,000 threshold at which the personal allowance then starts to be abated needs to be looked at as well. I call it the Jimmy Greaves principle where a lot of energy is expended keeping income below £100k. A lot of people would earn more and hence pay more tax if the system was properly progressive.

Paul Short - Lambert Chapman Partner

 

> Posted by Paul Short

 

 

 

Disclaimer: The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.

 

Lambert Chapman Chartered Accountants

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