Wednesday, 21 March 2007

In figures: the effect of Brown's tax rebanding

In his last budget, Gordon Brown has announced changes to the tax system. He's cut the basic rate of income tax by 2p. However, he's increasing (note: not scrapping) the 10p rate up to the level of the basic rate.

After a thoroughly anoracky afternoon messing around on Microsoft Excel, I've made a chart showing the effect of Gordon's changes, as applied to the 2007-2008 financial year. It's only a rough guide; I'm neither a tax lawyer nor an Excel expert - but it does give a good general idea of the effect they'll have.

And the answer is: well, not a great deal. The tax cut and the tax increase cancel each other out pretty effectively. Most people won't notice much difference. Apart, that is, from those on the margins.

Let's start at the top. People with incomes over about £40k will benefit from a raised threshold on top rate tax. For example, under the current system, a pre-tax income of £48,000 translates into £37,384 in your pocket. After Brown's changes, that'll increase to £39,440. I'm not complaining too much about this. Indeed, Lib Dem policy is to raise the top rate threshold even further, to £50k, which we'd balance out with green taxation.

But what worries me is the fact that Gordon is dipping into the pockets of those on very low incomes, especially those hovering round about the minimum wage. If you're earning £14,000 pre-tax, the new banding will see you handing over £100 more to the Treasury than under the current system. I'm all for the redistribution of wealth, but surely it has to be redistributed in the right direction?

The truth is, the Chancellor hasn't changed much at all. He's giving and taking away at exactly the same time, and it all cracks out about the same - with the disadvantage that it hurts those most in need of our help. It's both gimmicky and entirely counter-productive.

That'll be New Labour, then!


Will said...

Are you sure those axes are correctly labelled? You seem to have larger post-tax incomes than pre-tax.

Jonny Wright said...

Will, you're absolutely right. I'd labelled the axes the wrong way round. It's now fixed.

Negative taxation, now there's a thought ... wouldn't it be lovely if Gordon Brown gave you 40p for every quid you earned!

Ken said...

Is that right? I thought the tax cut was coming into force April 2008... I don't know when the starting rate is being changed...

Jonny Wright said...

The cut in basic rate isn't coming in till tax year 08-09, as I understand it. The chart is just to compare the two banding systems with each other, so I applied both systems to the coming financial year.

(The personal allowance changes between 07-08 and 08-09, so it wouldn't be an accurate comparison of the effect of the rebanding. Obviously the systems won't be in force simultaneously!)

Craig Aston said...

You say it's not much because the pink and blue lines look roughly the same. That's only because of scales and because £100 takes up half a millimetre if £50k takes up 25cm on your graph.

But when it comes to brass tacks, if you're on £14k pa (so about £275 per week), £100 is a fair bit of cash - think of it as 0.7% of your annual income, then imagine that happens again next year - not very good.

Seeing as I'm on £25k pa, I probably gain/lose 1/1ooth of a millimetre or something (haven't worked it out), so might not care - but it seems a very retrograde step for a Labour Chancellor to be introducing, and for the Govt benches to have cheered last week.

C xxx

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