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Five million workers to pay higher rate of tax by 2014

FIVE MILLION workers on ‘relatively modest salaries’ could be dragged into a higher rate of tax as a result of changes to tax threshold announced in the Budget, a leading think tank has said.

The Institute of Fiscal Studies (IFS) estimates that the government’s decision to lower the threshold at which people enter the 40p tax band from next year will increase the number of higher-rate payers by 325,000. The IFS added that ‘fiscal drag’ could mean that the number of people paying 40% tax could rise from 3.7 million in 2011 to five million by 2014.

“This is part of a long-term trend towards the encroachment of 40% income tax onto people earning above-average but relatively modest salaries,” said IFS director Paul Johnson.

“It would be useful to know if the chancellor has a view as to what proportion of taxpayers should be paying the higher rate.”

The cut in the threshold, which helps offset the £3.5bn cost of increasing the income tax allowance to £9,205 in April 2013, lowers the point at which people enter the tax band from earnings of £42,475 to £41,450.

The IFS also cast doubt on HM Revenue & Customs estimate that cutting the top rate to 45% will only cost £100m, labelling the prediction as ‘highly uncertain’.

“It assumes a “no behaviour change” cost of £3bn offset by a behavioural change of £2.9bn. The first number we know reasonably accurately; the second number is estimated with great uncertainty,” Johnson said.

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