THE TAX TRAP THAT SAPS THE ECONOMY (APPARENTLY)

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THE TAX TRAP THAT SAPS THE ECONOMY (APPARENTLY)

I wonder what the readership profile of the Sunday Telegraph is.  Why?  Because of an article in a recent issue about “The 62pc tax trap that secretly saps the economy”.

Does it really?  Well, we are told that “Telegraph Money reader Anthony Niven, a contractor, said he turned down work to ensure he did not pay over the odds.  “I always make sure I make no more than £100,000 a year” he said.  “What’s the point?  The tax burden is just not worth it”.  And Andrew Sprale said that he retired early because “When you look at what you have to do to earn a good living and what is actually left in your pocket, it hardly seems worth it under the current system”.

We are also told that “it is mainly small business owners and the self-employed who alter their behaviour to avoid the higher rate tax, making sure their annual earnings do not stray into six figures”.

So what is that tax trap that saps the economy?  If you have net taxable income of more than £100,000, your £12,500 income tax personal allowance is gradually withdrawn.  You lose £1 of allowance for every £2 in excess of £100,000.  For a 40% taxpayer, the personal allowance gives a tax saving of a maximum of £5,000 (i.e. 40% of £12,500).

Just to put that in perspective:

                        Income                                                Tax                        Average rate

First                 £12,500                       nil                      nil

Next                 £37,500                       20%                   7,500

Next                 £50,000                       40%                £20,000

                        100,000                                               27,500                         27.5%

Next                   10,000                       60%                   6,000                        

                        110,000                                               33,500                         30.45

Next                   15,000                       60%                    9,000

                        125,000                                               42,500                         34%

Next                   25,000                       40%                 10,000            

                       £150,000                                               £52,500                        35%

Above £150,000 the rate increases to 45%.

The so-called tax trap that is sapping the economy is the 60% effective rate on the £100,001 to £125,000 tax bands, i.e. 40% on each extra £100 of income plus the loss of tax relief on 50% of the £100 (i.e. another £50x40%=20%).

The clawback is not new.  It is a legacy of Alistair Darling’s spell as Chancellor of the Exchequer.  As such, it has been with us since 6 April 2010, so it seems to have taken the Sunday Telegraph 10 years to notice how damaging it is.  Of course it is a needless complication of the tax system.  It is disappointing that neither George Osborne nor Philip Hammond felt it appropriate to simplify the tax system and find another way to raise this little bit of extra money from the rich.

Yes, the rich!  When it was introduced, the government explained “the clause ensures that those with the highest 2 per cent of incomes will no longer get twice the amount of benefit from the personal allowance that a basic rate taxpayer with an income of £10,000 would receive.  That 2 per cent may be a bit larger now.  The latest HMRC statistics say that only 5% of taxpayers have income of over £83,000.  So it may be 3% now.  It is undoubtedly well below 5%.

So are the bulk of the Sunday Telegraph’s readers drawn from that 2% or 3% elite?  If not, why devote half a page to bemoaning how unjustly that 2% or 3% is treated.

The Office for National Statistics says that average household income, i.e. the combined income of husband and wife, is £29,400 if you take the median figure or £35,300 using the mean figure.  Whichever figure you adopt, that means that the 2% or 3% of people affected earn around three times the average of the other 97% or 98%.

So does taking up to £5,000 extra tax from the top 2-3% of income earners really sap the economy?  I doubt it.  I have never come across anyone who wouldn’t want to earn an extra £10,000 even if he or she gets to keep only £4,000 of it.  I accordingly think that Mr Niven and Mr Sprale are exceptions to the norm; not representative of it.  Most of the small business owners that I know either earn well below £100,000, or need the income to meet their living costs, so I am intrigued to learn that it is mainly small business owners who shut up shop at £100,000 of income, with no ambition to grow the business any further.  That is so alien to my own experience.

I am perhaps most puzzled by Mr Niven and Mr Sprale.  I would be embarrassed to publicly tell my friends and neighbours that, even though I am lucky enough to be within the top 2-3% of earners in the country, I would rather stop working than pay a few extra quid in tax to ease the tax burden of those a lot less well off than myself. 

ROBERT MAAS