Cameron's tax chat: a big hint or a little electioneering?

Jul 31, 2014
The Mole

PM says he would 'love' to raise 40p tax threshold – but he can't promise it, and here's why

Dan Kitwood - WPA Pool / Getty Images

David Cameron said yesterday he would "love" to be able to raise the threshold at which the higher 40 per cent tax rate kicks in.

This has been taken by The Guardian and others as a big hint that the Tories are considering a pre-election tax giveaway to police officers, senior nurses, schoolteachers and other "ordinary workers" who have found themselves, after relatively small pay rises, being classified as rich when they feel anything but.

What the Prime Minister did not say, however, was just how expensive it might prove to raise the threshold from the current £41,865 a year.

Figures show that, because of what's known as "fiscal drag", 1.4 million workers have been drawn into the higher tax band since the 2010 general election. In effect, this has been the coalition government's stealth tax: without lifting a finger, and by simply refusing to raise the threshold in line with inflation or wage rises, Chancellor George Osborne has been able to boost the Treasury coffers considerably.

But Tory election strategists are growing alarmed at the anger of middle-class, middle-income earners on whom Cameron will be relying to get re-elected next May.

Hence the PM's rather cagey line on the issue yesterday.

"I know that a lot of people believe that the 40p rate now kicks in quite early and that quite a lot of people who don't see themselves as fundamentally very wealthy are paying that 40p tax rate," he told an audience of United Utilities staffers.

Could they sense the big BUT coming up?

"Now," Cameron continued, "I would love to be able to stand here and say we are going to sort all this out, we will raise the thresholds of all these tax rates. I can't make that promise today."

Until now, the Tories have run scared from helping the middle classes in the face of an effective campaign by the two Eds – Miliband and Balls – that Cameron and Osborne are Old Etonian toffs looking after the rich.

Instead, pushed by the Liberal Democrats, the Tories’ emphasis has been on handing out tax cuts to the low paid by lifting the starting rate of tax to £10,000. And Osborne has been clear that he would not offer tax cuts to the middle classes until he has balanced the books at the end of 2017 – two years after the election date.

But with the the economy growing faster in the UK than in most of the developed world, there is now a good argument for doing something about the high taxes on middle-income earners.

The upper rate was supposed to be for the very wealthy when it was introduced by Tory Chancellor Nigel Lawson 25 years ago. At that time, just one in 20 paid the higher rate – it is now one in six and could go higher. The threshold is due to increase by only one per cent next April – lower than inflation – dragging an extra 100,000 workers into the 40 per cent rate.

Of course, if Osborne does use the Budget next March to announce a major change to the 40 per cent threshold he'll be accused by Labour of blatant electioneering and of backing the rich at the expense of the poor.

But such a move looks a lot more likely than the 31p flat rate tax which Ed Balls cheekily claimed this week is being "mulled over" as potential Tory policy by the Cabinet Office minister Oliver Letwin.

A "uniform" tax rate would be hugely controversial because it would mean a tax cut for the rich and an increase for the poor, who currently pay 20 per cent.

Chris Grayling, the Justice Secretary, insisted on the Today programme this morning that the flat rate tax was no more than a Labour scare story. "It is not policy, it has not been policy and it is not going to be policy," he said.

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