Income tax looks set to be a key Budget issue on 19 March, with shadow Chancellor Ed Balls calling for the top rate to rise to 50% as thousands more people will be taken out of paying tax altogether.
The top rate of tax was cut by Chancellor George Osborne in his 2012 Budget, and has been 45% since April 2013.
When George Osborne cut additional rate income tax, from 50% to 45%, he explained that it raised less than was expected and could be seen as counter-productive.
Go further: Budget 2014 with Which? – get the latest news and advice in our Budget hub
Tax thresholds and personal allowance
There have been many changes to income tax levels in recent Budgets. The government has increased the tax-free personal allowance each year, meaning that thousands of people have stopped paying tax.
- The tax-free personal allowance was £6,475 in 2010/11;
- It increased to £9,440 in 2013/14;
- It will increase to £10,000 in 2014/15.
This effectively cuts the tax that lower-paid earners have to pay. Government estimates show that 24.5 million people will gain an average of £50 as a result of the 2014/15 personal allowance increase. At the same time, 257,000 individuals will be ‘taken out of tax altogether’.
Labour calls for top-rate tax increase
In January 2014, the Shadow chancellor, Ed Balls, indicated that a future Labour government would seek to raise the top rate to 50%.
Outlining his plans, he said, ‘For the next Parliament, we will restore the 50p top rate of tax for those earning over £150,000.’
Go further: Income tax explained – work out how much tax you should pay
Starting rate tax band
While calling for the top rate of tax to rise, Mr Balls also suggested that the lowest rate should fall. ‘We want a lower 10p starting rate of tax, which would help make work pay and cut taxes for 24 million people on middle and lower incomes’.
The 10% starting rate tax currently applies only to savings interest and is capped at £2,790.
Go further: Tax on savings – how the 10% tax band is applied