Budget 2013: Extra 400,000 People to be Caught in 40% Higher Tax Band

George Osborne is facing growing calls to cut taxes on middle class incomes after drawing nearly a million extra people into the 40% tax band since becoming chancellor, with another 400,000 expected to join their ranks in the coming tax year.

Twenty five years ago, when Conservative chancellor Nigel Lawson introduced the 40% band, only one person in 20 paid the higher rate. A quarter of a century on, Osborne is fuelling outrage among his own supporters with one in six taxpayers now paying tax at the 40% higher rate.

Unless Osborne reverses decisions he set out in the autumn statement, it is estimated that an extra 400,000 people will become higher rate taxpayers in the 2013/14 tax year, bringing the total to a record of 4.3 million people.

The Institute for Fiscal Studies thinktank estimated the figure could go as high as 5 million over the next three years, as the starting point for paying 40% tax is to be cut from £42,475 to £41,451 from 6 April, and is then planned to rise by just 1% a year thereafter.

Meanwhile, the 267,000 people paying the 50% top rate will see their tax take fall on 6 April when it drops to 45%.

Matthew Sinclair, chief executive of the TaxPayers' Alliance said: "At successive budgets and autumn statements, George Osborne has failed to cut the overall tax burden and instead chosen to take with one hand while he gives with another. With national insurance on top, the higher rate is the real 50p tax band and the chancellor has dragged more and more people into that punishing rate of tax. At the budget, he needs to give middle class families a break and stop increasing the tax burden on families struggling after the recession."

Figures from HMRC reveal that in the 2010/11 tax year, when George Osborne became chancellor, 3.02 million people paid tax at the 40% rate. The figure rose to 3.86 million in the 2012/13 tax year and will break the 4 million barrier in April when the starting point for paying 40% tax is reduced. Behind the rise is what economists call "fiscal drag" – when thresholds for paying tax fail to keep pace with growing earnings. In 1991/92, 24.1 million people paid basic rate tax and 1.6 million paid higher rate, but in 2012/13, 25 million paid basic rate tax and 3.86 million paid higher rate.

The government said focusing on the widening number of people caught by the 40% band fails to take account of more generous personal allowances, which means that more of the average worker's pay is tax-free. From April, the personal allowance jumps from £8,105 to £9,440, barring any last minute changes in the budget.

"The lowering of the tax bands where more tax becomes due has dragged more people into higher rates of tax. This is the trade off for taking those on the lowest incomes out of tax," said Francesca Lagerberg, tax partner at Grant Thornton. HMRC estimates that higher personal allowances have taken 2.2 million people out of the tax net over the past three years.

But the Association of Chartered Certified Accountants said that by lowering the starting point for 40% tax even new entrants into the jobs market, and many more pensioners, will be entering a tax band once seen as the preserve of the wealthy.

Chas Roy-Chowdhury, ACCA head of taxation, said: "It looks good for the government to say that they are extending the personal allowance, but it is only true for the ever shrinking population of 20% taxpayers. By dropping the threshold for the 40% income tax bracket, many hardworking people who will begin paying 40% for the first time will lose the benefits of the increased personal allowance and they will need to pay additional tax on such things as savings and dividend income.

"This is no longer the 1980s where only a small number paid the 40% income tax. Many people who are working but struggling at the lower end of that bracket will not get much respite from an increase in the personal allowance. The chancellor of the exchequer should use the budget to give taxpayers a much-needed boost and raise the personal allowance for all income tax rates, otherwise it is being less than honest."

Powered by Guardian.co.ukThis article was written by Patrick Collinson, for guardian.co.uk on Wednesday 20th March 2013 06.00 Europe/London

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