New IFS analysis of Boris Johnson’s two main tax proposals – to increase the income tax higher rate threshold (HRT) from £50,000 to £80,000, and to raise the point at which people start paying National Insurance contributions (NICs) is published today. It shows:
- Increasing the HRT costs about £9 billion and benefits the 4 million or so income tax payers with the highest incomes. Most of the gain goes to those in the top 10% of the income distribution who would gain an average of nearly £2,500 a year. The biggest gainers will actually be high income pensioners as they won’t be affected by the accompanying increase in the NICs ceiling;
- While only about 8% of individuals would gain from this change in the short run, probably at least a quarter will at some point in their lives be higher rate taxpayers themselves, or will live in a household with a higher rate taxpayer;
- Raising the HRT to £80,000 straightaway would take about 2.5 million people out of higher rate tax, taking the number of higher rate taxpayers down to its lowest level since 1990. This would constitute a major change to our income tax system;
- Increasing the point at which people start to pay NICs is probably the best thing one can do through the tax system to help low earning individuals, though even this policy offers most benefit to higher income households. Increases in tax credits would be significantly more effective if the main intention is to help low earners in low income households;
- Increasing the floor is expensive though, costing at least £3 billion a year for each £1,000 that it is raised. Raising it to the current income tax personal allowance of £12,500 would cost at least £11 billion and would take 2.4 million workers out of NICs altogether.
Tom Waters, a Research Economist at IFS and an author of this new analysis said:
“These are expensive pledges to cut tax. Raising the higher rate threshold as far as £80,000 would be a radical change benefiting high income households only, though it is important to be aware that the numbers paying higher rate tax have crept up over time, largely unannounced. There are now more than 4 million higher rate taxpayers compared with 1.5 million 30 years ago. Raising the floor for NICs helps low earners, though raising tax credits would be much more effective and better targeted if that were the key aim. These pledges between them will cost many billions of pounds. It is not clear that spending such sums on tax cuts is compatible with both ending austerity in public spending and prudent management of the public finances”