Liz Truss to raise income tax thresholds?

[GreenLunchBox]

There are rumours that she's going to increase the higher tax threshold to £80k. I think this is a good idea and will increase productivity. Sunak keeping the threshold frozen was a sneaky stealth tax. In this time of rampant inflation it's unfair for people to receive a small payrise and find themselves significantly paying more tax than before

It will also help with the rental property shortage as it will help to mitigate the unfavorable tax changes for landlords so less will be likely to sell up

But people get more money as they progress even when then move into the higher tax bracket

Of course they do. But if the additional net pay isn't proportionate to the additional responsibilities, effort or hours, then many people will decide not to do it. Obviously. Particularly when they have other pressures in life, like children to care for and elderly parents to look after. And who does that normally fall on? Women.

I see it all the time at work. Men are facilitated in taking the longer-term view on this being progression. Women have to be more pragmatic about the fires they are fighting right now. So often - with monetary incentive largely removed by excessive tax - women will choose to "coast" and not go for promotions.

If we want a more equal society, removing excess tax burdens from people who are not wealthy so that there is incentive to continue to progress in careers is essential. Unfortunately often the stage of career advancement that coincides with getting to really fantastic jobs later is the stage at which 1) many women have young children; and 2) the tax bandings wreak havoc on the effort/ responsibilities: take home pay equation.

Uprating thresholds properly can largely remove this barrier. This would be good for individuals, particularly many women, particularly many lone parents! But also for the equality of society as a whole.

The current system has many distortions which discourage economic activity as I described above. Many posters have given personal anecdotes of it, also.

There is a reason that every Government in the last 20 years had proclaimed it will reform the tax system: it does not function how it should.

They all bottled it though because it's "too hard" (i.e. people would make the kinds of silly comments that are rampant on this thread). I hope somebody finally does it. It needs to be done. Annual uprating of thresholds at all levels should be enshrined in law.

20% of 80k is a lot more than 20% of 30k. I hate that tax increases as you earn more. Remember that a household income might just be that person on 50k rather than a single person or two people earning that.

This is also a key point. If the tax system is being reformed we need to start taxing on a family unit/ household basis, so that we stip penalising single parents by taxing them more on the same household income as a dual parent household. That is a disgrace and responsible for much of the child poverty in the UK.

@Deguster and there’s the pension tax charges too- higher earners in the nhs pension scheme are getting shafted paying charges on money held in the scheme. Scrapping that would bring a waiting list or two down I bet….

Yes. Mysteriously the threshold for the super tax on pensions hasn't been increased in years, either. In fact I believe Brown lowered it and it's never gone up at all since?! Bonkers.

That said, those with defined benefit pensions like NHS workers get an amazing deal already with the 20x benefit calculation for the threshold. Not remotely comparable to defined contribution schemes, as it is meant to be, on top of them taking no personal risk in the investment. So while I'd support that threshold being raised (for all pensions) it would have to be accompanied by a levelling of the playing field to make the multiple used to calculate the value of defined benefit schemes realistic and comparable to that for defined contribution schemes. Otherwise those with DB schemes benefit twice over - with risk/ generosity and also the theshold being applied to an artificially lowered notional value.

So the threshold for the super tax would have to go up a lot to make it viable to be implemented in a way that was also fair to people in other pension schemes.

Totally agree. I know doctors who have opted to leave nhs due to the ridiculous pension charge. Seems very short sighted of the government not to look at that. Especially in the last few years.

I think it’s a good idea and will increase productivity, I work in the NHS and with my baseline salary, overtime, bank shifts and oncall I’m now very close to earning 50k. As such I’m less likely to do extra hours because it’s not financially worth my time when 40% is taken off me just for tax. 50k is not what it used to be with inflation. Before anyone tries to say I’m over paid, I have a masters degree, specialist qualifications, many years experience and a senior position. I also think it’s not a race to the bottom, if people aren’t rewarded adequately for their hard work, skills and experience they won’t bother.

@elsi You working extra hours is not about productivity.
Whether you work extra hours or not will make very little difference to the country.

This may not technically meet the definition of productivity gain, but surely people choosing to use their time for productive pursuits rather than leisure is better for the country and the economy? And as the poster works in the nhs where there is a severe misalignment between labour demand vs supply there are further knock on benefits when we can increase the supply, get people healthier more quickly so they can go on to participate more fully in productive pursuits.

@Labraradabrador people on decent incomes who have more leisure time, spend more with local businesses.
If there is a shortage of a particular worker, doing extra hours might help, but only if they are not too tired to do a good job. There comes a point where extra working hours is counterproductive to the outcomes of a job role.

@antelopevalley you are making a few assumptions.

first, you assume that those doing more are already full time. Some of this will be overtime, but there are plenty of us who are underemployed by choice. Personally I work less than half time because there isn’t sufficient return on investment (doing a very personal calculation of what my time is worth) beyond that. There are also those that drop down or drop out entirely who with the right incentives could keep working- senior nhs doctors being one example frequently raised. You could have 20% of my extra income in tax revenues plus added benefit of higher economic activity, but because you insist on 40% I opt out and you get nothing.

second, you assume people spend more with more leisure, and assuming this is correct (I am skeptic all) do you have any evidence that this offsets the loss in tax revenue and economic activity? Personally I spend more when I am working more as I outsource daily chores, eat more meals in cafes, and also just buy more treats because I feel flush.

I always thought the tax system was reasonably fair until I had a revelation as a result of a conversation with a family member.

I'm on £10k a year as I am working part time whilst raising children. DH is on £80k a year. Our combined take home pay is less than a couple each earning £45k a year. What's more, we are not entitled to child benefit whereas my imagined couple would be.

@cap you can transfer your tax allowance to your DP if you are married. Your situation is because you are not taking advantage of this.

Sadly this is not true. Marriage allowance is only available where the higher earner is paying tax at the basic rate as per gov.uk:

"your partner pays Income Tax at the basic rate, which usually means their income is between £12,571 and £50,270 before they receive Marriage Allowance."

@Labraradabrador You are right I had assumed you were working more hours. You are earning £37k working less than half time. I suspect that is a fairly unusual position.
There has been lots of economic research that when working hours have been reduced by law, higher earners spend more on leisure.
You are asking for a cost-benefit analysis but that is assuming people will all work more hours. Everyone I know working reduced hours on better-paid wages are doing it for lifestyle reasons. I am sceptical that many would work significantly more hours.

Okay sorry about that.
It is because you are taxed as individuals, not as a couple. If you were taxed as a couple, a lower earning person could pay more tax than currently.

@antelopevalley among self employed people it is more common than you think. There is post after post here of people saying the tax threshold acts as a disincentive to increasing workload or growing a business (vat cliff also a factor). I am not debating the importance of taxation, but the reality is that it DOES act as a disincentive to work once basic needs have been met and once the incremental tax rate rises above a certain level. The way taxes in this country are structured result in big cliff edges, making the decision much starker, especially when paired with drops in benefit eligibility. A more gradual rise (jump from 20% to 25%) would soften the effect. At the moment, once I hit a certain threshold I close shop - any additional work I do is paid about HALF what I charge my clients. mentally that work feels pro bono once I also account for extra childcare, outsourcing and the decrease in quality of life.

Instead of reflexively increasing the tax burden, I would like to see more energy put into growing the economy. The self employed and small business owners could be bigger drivers of growth with better incentives (read I keep a majority of my incremental income)

@Labraradabrador I look forward to them all working another 15 to 20 hours a week then.

Yes. And you'll also pay significantly more tax.

This is why most comparable countries calculate tax on a family unit/ household basis.

It's also why the largest proportion of childhood poverty is in single parent households: they are taxed far more on the same household income. Totally unfair. A very easy fix for any Government that genuinely wished to improve outcomes for children, reduce poverty levels and increase productivity in the future workforce.

It's unfair on you, but you still have two people to share work and childcare! A lone parent has 24 hours per day for this not 48, but very similar expenses for the same number of children. Already they will have to pay far more for childcare because they can't work and look after their children at the same time. If there was ever a PM who cared at all about improving society or equality for women (90%+ of single parents are women) or children who had no say in what situation they are in, their first move would be to level this playing field and ensure a single parent is not taxed more than other households with the same income.

We hear how hard it is. But it isn't. They manage it perfectly well when it comes to benefits - when the net gain is to the Government of doing so. So do it for tax as well. I am baffled why nobody is campaigning for this as it is the most obvious and easily implementable solution to much of child poverty, and therefore securing our future as a country. Idiots in charge as usual who don't understand economics - despite LT's degree. I wonder how many economics modules she took? There are examples all over Europe where the system I have described works. If you want to reduce inequality quickly, that is the way: simply double all tax and benefit thresholds for single parents. Astonishing that no party has come up with this as it's such an easy way to fix so many problems.

No, you cannot. You can transfer a small part of it. They are looking at increasing this, though. But to do that without rectifying the tax system's penalisation of single parents would be beyond absurd.

High earner here, well was. Quit a year ago to take some time off and when I go back will reduce the nature of job or hours to be more tax efficient.

No issue with paying higher taxes and realise I’m lucky to have choices but the rate is so high it is a disincentive relative to the hours and stress, and when I don’t need to do that now.

Tax the rich won’t work out as people think.

HMRC have lost a very large sum just off me in 1 year. Had I not been taxed 45%, plus on lots of other things I may have continued. I was also subject to a 60% tax rate a few years ago due to quirks of losing personal allowance.

And no I don’t vote Tory but oppose increases in tax and anyone with basic economics understands that doesn’t work.

In fact we benefited from this system when we lived in France and our tax bill was calculated based on our household income which at the time was all earned by DH. Always thought that was a much fair system. Single parents absolutely do get shafted as you say.

when will the new tax rate be applicable from if confirmed

In fact we benefited from this system when we lived in France and our tax bill was calculated based on our household income which at the time was all earned by DH. Always thought that was a much fair system. Single parents absolutely do get shafted as you say.

Thanks for this post. And yes it's much fairer also for couples because there isn't the distortion in household tax/ income ratio based on who earns how much which is totally arbitrary really. But yes, it is single parents - and their children - who suffer the most from this distortion when they already have half the time to do the same jobs. I am shocked that so many people claim to care about equality/ feminism yet won't engage with this topic at all even though it is deliberately designed to disadvantage women and children.

Feminists fought for couples to be taxed as individuals not as a couple.

They did. And they did so because of the specific issues at the time. Per the earlier posts the issues are now very different and this actively disadvantages women, particularly single parents but many other women too. And children. Would you like to engage with any of the substantive points raised about the financial impact of this policy?