6/10 Tests for the Autumn Statement: Will Osborne address the 40p issue?

By Tim Montgomerie
_{Follow Tim on Twitter}

Last week I looked at the politics of abolishing the 50p tax band and don't want to revisit my conclusion that it needs to go as part of a very broad tax reform package. I'd be very surprised if George Osborne announces such a package tomorrow but that doesn't mean he shouldn't set down a few markers.

His tax priorities should be the low-paid and business. He also needs to address the 40p question. Many of us have all neglected the 40p issue while talking a lot about 50p. My apologies. But the 40p threshold matters for two big reasons. 750,000 more people are now paying it because of the new much lower threshold of £35,000. There's then the problem of withdrawing child benefit from people when they start earning about £40,000. "Around 175,000 people on £40,000 a year will see a doubling of their marginal rate of tax – the amount they lose through tax and benefit changes on every extra pound of income," reported the Daily Mail, continuing: "Complex changes to the tax and benefit system – largely the scaling-back of tax credits for the middle classes – will mean marginal tax rates for this group increasing from 30 per cent to 70 per cent from April 6 [2011]."

The Government is making it much less attractive for many middle class families to work that bit harder or tale on overtime. Iain Martin set out the problem in February:

"A couple with children earn £10K each (total £20K) and they will soon pay zero income tax. They’ll still get their £1500 or so in child benefit. Just along the road lives another couple with two children. One partner works, earning £35,000-ish, the other looks after the children. Soon the working partner will pay 40p in the pound on every extra pound he or she earns. Doesn’t sound like much of a spur to wealth creation. Oh, and now he or she is a 40p taxpayer their partner is just about to lose their child benefit. That’s another £1500 (the family holiday?) gone. Very family friendly."

The 40p tax rate was designed for relatively wealthy families. We are now imposing a 40% rate on far too many people. Some promise to raise the threshold in line with inflation plus would be welcome.

> Test seven at 4pm: What will Osborne say about Europe?