15:31 PM, 26th March 2012, About 9 years ago
Clever Chancellor George Osborne is masking landlord tax increases with smoke and mirror financial tricks that make income tax bills look better than they really are.
Many believe they are better off this year and next after all the talk about big increases in the personal allowance that lifts the poorly paid out of the tax system and lets everyone else earn more before they start contributing to the Government’s coffers.
While the Chancellor and other politicians have made hay out of the good PR of raising the personal tax allowance to £9,205 from April 6, 2013, they have quietly forgot to mention tens of thousands more taxpayers will pay more tax from this April.
The reason is fiscal drag.
Fiscal drag happens when income tax thresholds remain steady while prices and earnings are increase. This means that more people have to pay more of their income in tax.
Gordon Brown was a master of this ploy, which was why the number of people paying the 40p rate almost doubled between 1997 and 2008.
This year, around 3.7 million people pay tax at the higher rate of 40%, which starts when total earnings breach £42,475.
According to think-tank the Institute of Fiscal Studies, although the personal allowance increases next year, the 40% thresholds drops to £41,450, putting another 325,000 people in to the higher rate net.
“This is part of a long-term trend towards the encroachment of 40% income tax on to people earning above-average but relatively modest salaries,” said IFS director Paul Johnson.
The Chancellor lowered the 40% threshold to stop higher rate taxpayers from benefiting disproportionately from the increase in the tax-free personal allowance.
Higher rate taxpayers will gain £42.50 a year from the increase in the tax-free allowance, while basic rate taxpayers pick up an extra £170 a year.
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