It has been suggested that the change is necessary to counter the effect of fiscal drag, i.e. the tendency of governments (of all hues) to raise tax bands and allowances at a sub-inflation rate. As the graph shows, fiscal drag was the order of the day in the aftermath of the financial crisis. In real terms, today’s higher rate threshold is still about £3,000 below where it would be if it had been revalued in line with RPI over the last 15 years. However, in CPI terms – the current basis of indexation – it is about £2,000 above the 2014/15 level.
The Daily Telegraph, where Johnson launched his tax proposals, estimates their cost to the Treasury at £9.6bn. Johnson says this would be funded partly by increasing the national insurance upper earnings threshold in line with the new higher rate threshold and partly from money set aside by the Treasury for a no deal Brexit. The IFS is reported to have put the cost at around £9bn – about the same tax loss as reducing the basic rate to 18.4%.
The latest HMRC stats show that there were 4.114m taxpayers with income of at least £50,000 in 2018/19, of which 3.13m were in the £50,000-£100,000 band. Thus the full benefit of Mr Johnson’s idea would be felt by perhaps 1.5m people at the top end of the income scale.
An £80,000 higher rate tax threshold would have the largest benefit for wealthy pensioners, who would save 20% tax (25% for dividends) on £30,000, but not pay the corresponding extra national insurance contributions of up to 10% on the same amount. That is a small demographic, although probably not amongst the electorate of the next head of the Conservative party…
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