View all newsletters
Sign up to our newsletters

Support 110 years of independent journalism.

  1. Business
  2. Economics
14 March 2012updated 26 Sep 2015 8:16pm

Is Osborne really about to give people on £100k a tax cut?

The coalition’s travails over child benefit mean Osborne may revisit his decision to raise the perso

By Gavin Kelly

As we close in on the Budget, most eyes are still fixed on the fate of the 50p tax rate. Ignore for a moment some of the squeals from Labour on this issue (more in excited anticipation that it will be axed than horror) and spare a thought for the dwindling band of true Tory modernisers. Their two central ambitions over recent years have been to demonstrate an unswerving commitment to the National Health Service, and to show that they could govern the economy – and tax policy in particular – in the interests of the broad majority rather than the affluent elite. They are struggling to believe that, having watched the coalition conspicuously squander the first of these strategic objectives, it could be planning to deliver the last rites to the second, too.

Yet whatever the decision on the 50p tax rate, the heated debate over it risks obscuring another more nuanced, but still highly revealing choice facing Goerge Osborne. Who should benefit from the widely expected and costly increase in personal tax allowances: the vast majority of all taxpayers, including individuals to over £100,000 a year (and indeed households on £200,000), or just basic-rate taxpayers? It’s an important issue in its own right – and one that has been given fresh impetus by the coalition’s travails over child benefit.

To understand why this is the case, turn the clock back to 2010 when the personal allowance was first increased and the decision taken to limit the gains to basic-rate taxpayers. This was achieved by lowering the income threshold at which the 40p rate starts in order to cancel out the gains for higher-rate taxpayers – leaving them no better or worse off. Creating more 40p tax-rate payers has obvious political downsides. However, it makes the personal allowances policy both less regressive and significantly less costly. The savings could be used to help reverse this year’s cuts to tax credits.

One of the main reasons why there was such a hostile reaction from many quarters to the initial decision to target the gains from the personal allowance in 2010 was the disastrous way it got caught up with Osborne’s proposal to abolish child benefit for households with a higher-rate taxpayer. It meant those basic-rate taxpayers who found themselves shunted into the 40p rate not only faced a higher marginal tax rate but were also set to lose £1,750 of child benefit if they had two children.

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU

This was pure political poison. Consequently, when a further increase in the personal allowance was announced in 2011, a different approach was adopted and the gains went to higher-rate taxpayers, too.

Which brings us to next week’s Budget and how the decision that is set to be made on revising the policy on child benefit could also affect the one on personal allowances.

To date, the coalition’s argument on child benefit has been that, given the scale of the deficit, the state can no longer afford to pay it to households with someone earning above £42,500; indeed, it is also argued that it is morally unfair to ask low-income families to contribute towards higher earners’ child benefit. In which case you might well ask why we can afford tax cuts for individuals earning £100,000 (and households with a joint income over £200,000), regardless of whether they have children. You might also ask why it is fair to ask the same low-income family to contribute towards the cost of these tax cuts for the affluent.

I don’t know how the coalition proposes to answer this. But as things stand they’ll need to do so next Wednesday. Pity the poor soul in the Treasury being tasked with drafting the “lines to take” for ministers.

There is, however, a potential get-out clause for them. The approach now being touted as the likely change to Osborne’s child benefit policy is to means-test the benefit at a higher level of income – say, £50,000 rather than £42,500. Whatever other problems this creates (and there are many), it will make it possible to restrict gains from an increased personal allowance to basic-rate taxpayers without creating the toxic side effect of stripping child benefit from those who get tipped into the 40p tax band. The coalition could, if it so wished, show that its priority really is basic-rate taxpayers (and in doing so save money).

We’ll know soon enough. My tentative hunch is that the government won’t opt to restrict the gains from increased allowances to 20p tax-rate payers – even though it is clearly more progressive and cheaper. I doubt the Chancellor will be willing to incur the price of creating more 40p taxpayers. If this is the case, the coalition will have some explaining to do, not least to its own backbench rebels on child benefit, about why a family on £50,000 should lose cash support while individuals without kids earning double that amount should get a tax cut.

And all this, of course, is before we get to the decision on whether to abolish the 50p tax rate . . .

Content from our partners
The promise of prevention
How Labour hopes to make the UK a leader in green energy
Is now the time to rethink health and care for older people? With Age UK

Select and enter your email address Your weekly guide to the best writing on ideas, politics, books and culture every Saturday. The best way to sign up for The Saturday Read is via saturdayread.substack.com The New Statesman's quick and essential guide to the news and politics of the day. The best way to sign up for Morning Call is via morningcall.substack.com Our Thursday ideas newsletter, delving into philosophy, criticism, and intellectual history. The best way to sign up for The Salvo is via thesalvo.substack.com Stay up to date with NS events, subscription offers & updates. Weekly analysis of the shift to a new economy from the New Statesman's Spotlight on Policy team. The best way to sign up for The Green Transition is via spotlightonpolicy.substack.com
  • Administration / Office
  • Arts and Culture
  • Board Member
  • Business / Corporate Services
  • Client / Customer Services
  • Communications
  • Construction, Works, Engineering
  • Education, Curriculum and Teaching
  • Environment, Conservation and NRM
  • Facility / Grounds Management and Maintenance
  • Finance Management
  • Health - Medical and Nursing Management
  • HR, Training and Organisational Development
  • Information and Communications Technology
  • Information Services, Statistics, Records, Archives
  • Infrastructure Management - Transport, Utilities
  • Legal Officers and Practitioners
  • Librarians and Library Management
  • Management
  • Marketing
  • OH&S, Risk Management
  • Operations Management
  • Planning, Policy, Strategy
  • Printing, Design, Publishing, Web
  • Projects, Programs and Advisors
  • Property, Assets and Fleet Management
  • Public Relations and Media
  • Purchasing and Procurement
  • Quality Management
  • Science and Technical Research and Development
  • Security and Law Enforcement
  • Service Delivery
  • Sport and Recreation
  • Travel, Accommodation, Tourism
  • Wellbeing, Community / Social Services
Visit our privacy Policy for more information about our services, how New Statesman Media Group may use, process and share your personal data, including information on your rights in respect of your personal data and how you can unsubscribe from future marketing communications.
THANK YOU