Budget 2012: More to pay higher-rate tax, says IFS

The changes announced by the chancellor affect income ranges differently

More and more people on "relatively modest salaries" are being dragged into becoming higher-rate taxpayers, Budget analysis suggests.

The number of higher rate taxpayers, who pay a chunk of their income at the 40% tax level, could rise from 3.7m last year to 5m by 2014.

The Institute for Fiscal Studies (IFS) made the prediction after studying changes to tax levels in the Budget.

However, lower-income families will benefit from the changes.

In the Budget, the government also decided to end age-related tax allowances for pensioners.

The IFS said that move will cause pensioners to lose 0.25% of their income in 2014.

<bold>'Millionaires pay less'</bold>

Shadow chancellor Ed Balls criticised the changes to pension allowances.

"The fact is the normal increase in the state pension just keeps up with inflation, but cuts to personal allowances in the Budget will mean 4.4 million pensioners are worse off in real terms," he said.

"It's now even clearer that this was a Budget that asked millions to pay more so millionaires could pay less."

But Chancellor George Osborne told the BBC that no pensioner would be worse off in cash terms, including the "largest increase in the state pension" next month.

"The net changes made by this government, including introducing this triple lock, mean that pensioners are better off."

The tax-free chunk of income, known as the personal allowance, is rising for the under-65s to £9,205 in April 2013.

The IFS said this would cost the Treasury an estimated £3.5bn, and would mean 675,000 fewer people would pay income tax.

In order to pay for this and ensure those with higher incomes did not benefit as much, Mr Osborne also reduced the higher rate threshold again from £42,475 to £41,450 in April 2013 - including the higher personal allowances.

This is the point at which people start paying 40% tax on their income.

The number of higher-rate taxpayers could go up by 1.3m from 2011 to 2014, the IFS said.

"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 at the higher rate."

He said that there would be 15% of taxpayers in the higher-rate band next year, compared with 5% in the late 1980s.

From 6 April, people earning taxable incomes of up to £34,370 will pay 20% in tax and people earning between £34,371 and £150,000 are taxed at 40%.

50p tax debate

One other major change in the tax landscape was the planned reduction in the top rate of tax from a 50p rate to a 45p rate from April 2013.

The chancellor said that this measure was the result of the 50p rate failing to raise significantly higher amounts of money for the Treasury.

However, the IFS said that those who chose to change their financial affairs to avoid the 50p rate might do the same with the 45p rate.

"We do not know with anything like such certainty that the cut in the 50p rate will cost only £100m," Mr Johnson said.

The uncertainty on this and a number of other matters led the IFS to call into question the chancellor's calculations.

"This Budget may turn out to be less fiscally neutral than intended," Mr Johnson said, referring to the chancellor's assertions that his tax and spending decisions balanced each other out.