Headlines filled with comments about ‘a Budget for the wealthy’ and talking about cheers on trading room floors as high-paid traders get a tax break won’t have been what the new Chancellor wanted after his first turn at the dispatch box. The news coverage and the dismal market reaction to Kwasi Kwarteng’s first fiscal update have prompted him to promise more is in the pipeline to help the ‘squeezed middle’ who were largely overlooked in last week’s statement.
Laura Suter, head of personal finance at AJ Bell, comments on Kwasi Kwarteng’s statement that he wants to continue to cut taxes: “The new Chancellor appeared to rule nothing out, saying all tax rates and allowances are on the table and being examined for reform. One particular area that looks ripe for overhaul is the awfully named Child Benefit High Income Charge, which has been stuck at £50,000 since it was launched in 2013*. With wages rising, inflation rampant and childcare costs soaring it feels particularly unfair that a single-income family where one person earns £60,000 wouldn’t be entitled to any child benefit. The Government has two options: it could scrap the threshold altogether, meaning everyone would be entitled to child benefit regardless of income, or it could raise the threshold to a higher rate. The first option is more radical and fits with the Government’s current agenda of simplifying the entire tax system, but it would add to the cries of tax breaks for the rich if those on million-pound salaries could claim child benefit.
“One idea floated in Liz Truss’ campaign that didn’t get any airtime last week was a tax break for married couples. Truss talked about extending the current Marriage Allowance, where one non-earning half of a couple can share some of their personal allowance with their partner, so long as the partner is a basic-rate taxpayer. Truss planned to supercharge the tax break, allowing the non-earner to pass over their entire £12,570 tax-free allowance, meaning a potential tax saving of up to £2,514 a year. The tax break is at odds with a society where it’s now most common for both parents to work full-time and where three-quarters of mothers work**. It also doesn’t fit with the Government’s agenda of boosting the number of people in work. To sanction Universal Credit claimants for not working more hours but give a tax-break to stay-at-home parents and carers feels like very muddled Government policy. However, it would give a boost to households where one parent can’t or doesn’t want to work.
“The glaring anomaly left after last week’s overhaul of income tax is the tapered personal allowance, where someone starts losing their tax-free allowance once they hit £100,000 of earnings, at a rate of £1 for every £2 earned over the threshold. It means that taxpayers at this level have an effective 60% tax rate on their earnings between £100,000 and £125,140, which looks even more odd now the additional-rate tax band has been scrapped. It’s this kind of complexity in the tax system that the current Government says it wants to get rid of. However, another tax break for those on £100,000 or more is not going to do much to stop the headlines proclaiming this is a Government for the wealthy.”