Freezing the basic rate limit is an expensive stealth tax

Today’s budget saw a freeze in the basic rate limit of income and the level of personal allowance (tables A.3 and A.4). Historical data tells us that the basic rate limit is nowhere near as high as it should be already, if it had kept pace with increases in people's earnings. This means workers have effectively been overtaxed thanks to Gordon Brown and now Alistair Darling not increasing thresholds in line with average earnings over for the last decade.

The graph below shows us that the upper level for the basic rate of income tax should have been £40,300 in 2009-10 when adjusted using the average earnings index. Successive budget announcements have not kept up with this however and it was frozen today at £37,400, the 2009-10 level:


The result is more tax revenue in the Government’s coffers. Using the Treasury’s Tax Ready Reckoner (page 9), we can work out just how much this has cost taxpayers this year. Adjusting the basic rate limit by 1 percent yields a change of £160 million. The basic rate limit is 7.75 percent lower than it should be, so:

£160m x 7.75 percent = £1,241m

So fiscal drag in the basic rate limit has cost the taxpayer £1.24 billion in 2009-10 alone. The difference between the actual basic rate limit and the limit had it been adjusted in line with average earnings mean that people earning a salary somewhere in between the two lines will have paid up to £580 more in income tax in 2009-10 than if adjustments had followed the earnings index.

Today’s freeze amounts to nothing more than another stealth tax hike for 2010-11.

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