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Millions to be hit by 40 per cent tax in UK

Watchman

Alfrescian
Loyal
Millions to be hit by 40 per cent tax:
Quarter of workers 'will be higher-rate taxpayers by 2015'

By James Chapman
Last updated at 1:42 PM on 1st February 2011

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One in four workers could be paying higher-rate tax by 2015, experts claimed last night.

They predict that as many 3.5million people may be sucked into the 40 per cent band. Even teachers and nurses face being hit.

The Institute for Fiscal Studies report said extra indirect taxes, such as January’s rise in VAT sales tax, will set families back by an additional £480 a year.
Teacher writing on blackboard

The Institute for Fiscal Studies predict that as many 3.5million people may be sucked into the 40 per cent band. Even teachers and nurses face being hit

Changes to benefits and direct taxation will cost them a further £200.

Paul Johnson, a director at the institute, said 750,000 more workers would become higher-rate taxpayers in April because George Osborne has lowered the income level at which it is applied.

And he forecast hundreds of thousands more will join them as a result of a coalition commitment to ease the pain at the other end of the salary scale.

If one in four paid the higher rate of tax, it would apply to around 7.5million people instead of around four million now.

Around 175,000 people on £40,000 a year will see a doubling of their marginal rate of tax – the amount they lose through tax and benefit changes on every extra pound of income.

Complex changes to the tax and benefit system – largely the scaling-back of tax credits for the middle classes – will mean marginal tax rates for this group increasing from 30 per cent to 70 per cent from April 6.

‘The Government has said it has an ambition to increase the allowance, the point before which you don’t pay income tax, eventually up to £10,000, but this year they’re putting it up to £7,500,’ said Mr Johnson.


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‘In order to help pay for that, they want to ensure that higher-rate taxpayers don’t gain. In order to prevent higher-rate taxpayers from gaining, they’ve reduced the point at which you start to pay higher rate tax, thereby bringing an extra three-quarters of a million people into higher rate tax.

‘Those who are being hit the very hardest are those on actually much higher levels of earnings.

‘If you take the changes over the last couple of years – the 50p rate coming in at £150,000, the taking away entirely of the personal allowance for those earning over £100,000, and some fairly substantial changes to pension tax relief – it’s those even further up the distribution who being hit the hardest.

‘But there’s clearly a group just over £40,000 who are being brought into this 40p bracket who will start to lose their child benefit and indeed who are losing some elements of the tax credit system as well. So there’s certainly a group there being hit as well.’

From April the threshold for higher-rate tax will be £35,000 of taxable income, compared with £37,400 now. The personal allowance – the amount you can earn without paying any tax – will rise to £7,475 from £6,475.

Mr Johnson praised the moves to simplify the system and help those on low and part-time incomes.

But he added: ‘The only way of doing that in an affordable fashion is to bring more people into the higher-rate band and that actually carries on a trend which has been going for a very long time.

'It’s not so long ago that only about one in 20 taxpayers were paying the higher rate. We think that within three or four years that’s going to be one in four or one in five, so this is a very, very big change.’

Accountants predict that increasing numbers of middle earners will respond with tax avoidance measures.

These might include increasing contributions to pensions and other benefits to reduce gross pay and therefore reduce sums paid in tax and National Insurance.

The Treasury said the IFS analysis was faulty because it assumed all future changes to tax thresholds at the lower end of the income scale would be funded in the same way as those being made in April – by lowering the higher-rate threshold.

A spokesman said: ‘This is based on an assumption that has no foundation. We will set out our fiscal plans at the Budget every year.’

David Cameron insisted yesterday the Government would not be deflected from its deficit reduction plans, however painful. ‘The Opposition is suggesting an alternative,’ he said. ‘They are wrong.

‘If we suddenly said “We are going to tear up our Budget plans, we are going to turn the taps of government spending back on again, we are not going to care about the deficit”, I think the rest of the world would say “How can I have confidence in Britain if they are not going to pay down their debts?”.’

I'd be better off without my pay rise

The tax shake-up comes at a high price for Liam Fowler and his family.

The 34-year-old, who works for an insolvency firm, earns around £40,000 while his 32-year-old wife Davina stays home to care for Joshua, six, Caleb, five, and Noah, 21 months.

But he expects his salary to hit £42,500 next year after passing industry exams, just taking him into the higher-rate tax bracket.
Liam Fowler and his family

Liam Fowler, 34, earns £40,000-a-year, but bizarrely he will be worse off next year as his salary is expected to hit £42,500

Bizarrely, that will make his family worse off because, from 2013, households with a high earner lose their child benefit. Adding in other tax and benefit changes, the £2,500 pay rise will cost Mr Fowler £3,000 a year.

Mr Fowler, from Lee in South-East London, said: ‘The changes are going to hit us really hard. I don’t think it’s fair on many working families.

‘I may be forced to turn down my next pay rise in a bid to avoid being in a higher tax bracket, as it would leave us better off.

‘We both voted Conservative at the election, because we thought they were going to help out hard-working families. Actually, it’s been the opposite. They’re making it more difficult for us.

‘We are by no means super rich. We live a modest existence. Currently, we are a family of five living in a two-bedroom property and are trying to save up for a bigger place.

‘The Governments seem to be targeting hard-working families, who seem to be losing out the most by these changes. In many ways the changes are a disincentive.

‘I have worked so hard to get the qualification I’ve got. The big motivating factor for me was that I had a family at home to support. My income will go up in the next few years, but I’ll be no better off. We’ll be effectively standing still.’

Mr Fowler began working as a trainee in the 1990s on just £8,000 and had to work his way up the pay ladder to support his family. When her second child was born, Mrs Fowler gave up her £15,000 job as a nursery nurse to save money on childcare fees.

Their £188 child benefit pays for little more than two weeks of food shopping in a month, while they also have to find mortgage payments of £700, bills of £120 and car running costs of £150.

Mr Fowler added: ‘People assume that if you’re earning more than £40,000 you must be raking it in, but that’s not the truth at all. That money has to stretch a long way if you have kids.

‘We don’t go out together often. We like to do it, but we choose not to in order to save money.’

Read more: http://www.dailymail.co.uk/news/art...higher-rate-taxpayers-2015.html#ixzz1Cmvmtzes
 
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