Partner Article

Budget 2014 predictions: Will the UK’s fiscal diet put further pressure on the squeezed middle?

Most of us would probably like to lose a few pounds round our tummies. But what happens if we attempt the same squeeze round the nation’s middle?

Such thoughts are prompted by the Liberal Democrat proposal to raise the personal allowance to £12,500 and, at the other end of the political spectrum, a suggestion by a Conservative pressure group that people should only start to pay higher rate tax at incomes in excess of £62,000: currently the figure is £41,451.

So at what point should people start to pay higher rate tax? In 1978, about 3% of all payers paid higher rate tax. Currently the figure is about 15%. If the LibDem plan was enacted and any benefit was confined to basic rate taxpayers, people would start to pay higher rate tax on earnings of just over £38,000. This would bring many more earners into higher rate tax. Given that average UK earnings are in the order of £26,500, higher rate tax could rapidly become the norm for millions of earners who would not under any circumstances consider themselves well off, let alone rich.

But if ‘the middle’ is not to be squeezed where else is money to be raised? At the moment the top 25% of earners contribute 75% of all income tax revenues and even more astonishingly, the top 1% pay 29% of the total tax.

If benefits are taken into account the position is even more stark. Currently about 55% of households are net beneficiaries from the state, in that they receive more in benefits than they pay tax. Less than half of households actually contribute at all to the state.

The numbers are notoriously difficult to analyse but it’s reasonably clear that until a household’s income before tax is around £35,000 it is probably not contributing at all to government revenues. Taking millions more people out of tax by radically increasing the personal allowance will skew these figures even more. As it is unsustainable for the highest earners to carry an even higher burden of tax revenues that only leaves people in the middle!

There’s no point in dieting to lose weight round the tummy only to put it back again on the hips or chest. Does the same apply to the UK fiscal diet? I rather think it does…

This was posted in Bdaily's Members' News section by Baker Tilly .