High earnings tax threshold raised, but does it do enough?

Before the election, the seven-year stasis of the higher tax rate was very much part of the leaders’ debate. As much as Chancellor George Osborne had wanted to raise it during the coalition, allegedly Nick Clegg had been obdurate. The £40,000 higher tax rate threshold therefore remained.

In Osborne’s first budget, that changed. We’ve had a glimpse of how the Conservatives hope to get us towards the fabled £50,000. It’s an income that now signifies crossing an imaginery ‘wealth’ line.

Okay, it’s a baby step towards that figure. The higher tax rate raised to £41,865; it’s worth mentioning that’s above the rate of inflation.

Next year, we’ll start paying 40p in the pound once we earn more than £42,700 and in the subsequent year, that raises again, up to £43,300.

By the time 2019 rolls around and the Conservatives have just one year left in office, sources believe we’ll see £45,020 as the most you can earn and remain in the lower tax bracket.

They’re steady increases, and show that the Conservatives are putting money where their mouths are. But the impact of such small increments will result in a threshold way shy of the £50k.

Can the small increments achieve the long-term objective?

The Conservative’s plan is to take one million people out of the higher tax rate altogether. The problem is, at current projection, more people will be sucked into paying 40p than those being lifted out of it.

Now, a lot of contractors wouldn’t consider setting up a company if they didn’t think £40k a year was on the cards. It’s not so much the money; it’s all of the hassle that goes with it.

Paying accountants, share declarations, two lots of NICs, the spectre of IR35 and the uncertainty between contracts? If you could earn £40k as an employee and only pay 20p in the pound, plus your national insurance, they have a case.

But if the rate was £50k? Well, that does give contractors some scope. Based on an eight hour day and 46-week year, you’re looking at a day-rate just shy of £220/day before the 40p in the pound rate kicks in.

By comparison, expenses that qualify for tax relief have a lot more wedge to go at with £50k. Accountants could be more be effective with more compliant tax-planning measures than the with current figure(s).

Fiscal drag: a net that could catch some big fish

As it stands, professional civil services like the police, nurses, doctors and teachers will feel the ‘fiscal drag’.

With the cooling off of accepting the provision of such services by the NHS trusts, nurses employed direct will have little choice other than to pay the 40p in the pound. They are truly caught between a rock and a hard place:

  • work as a short term contractor and risk not being employed, plus see some expenses no longer qualify for tax relief if the proposed changes to travel and subsistence benefits come to pass;
  • work as an employee and start paying the 40p in the pound as soon as their earnings get there, no matter what.

We get a sense that the government is trying to push self-employment. But it’s shooting itself in the foot by making contracting compliantly through payroll and umbrella companies only marginally better off than being employed direct.

Many people, including Tory back benchers, are looking for Mr Osborne to get to £50k as the higher tax threshold sooner rather than later. Amen to that.

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