Peers take aim at freezing of higher rate threshold

Lord Balfe (Con) enquired if the government has any plans to adjust the threshold for the higher rate income tax of 40 per cent to account for inflation.

Baroness Penn, the Parliamentary Secretary for HM Treasury, said that the government must ensure the tax system supports strong public finances, arguing that the income tax higher rate threshold is high enough to protect most public from paying the higher rate of income tax. She said that approximately 80 per cent of all income tax payers pay at the basic rate only.

The country will be “crippled by this level of taxation”, claimed Lord Balfe, arguing that 1 million middle class earners are paying the higher rate of tax in the last two years. He suggested that with the withdrawal of child benefit, the effective rate of tax between £50,000 and £60,000 is around 61 per cent.

Baroness Penn affirmed that the government would like to bring taxes down, however they need to be fiscally responsible. “[T]he best tax cut we can give people is to cut inflation”, she said.

Lord Sikka (Lab) pointed out that due to government policies, an extra 4.2 million people are expected to pay the basic rate of income tax this year on top of national insurance. He asked the minister to explain how this policy aligns with the government’s levelling up agenda.

The minister disagreed with Lord Sikka and said that the government brought down the additional rate threshold at Autumn Statement 2022.

Lord Macpherson of Earl’s Court (Crossbench) highlighted the impact of inflation on taxpayers and asked whether the minister agreed that “the amendment introduced by Lord Rooker, along with Audrey Wise back in 1977 is perhaps the most important principle informing our tax system”. (This amendment linked personal tax allowances to the rate of inflation.) On this point the minister said she would have to check the record as that was ‘at least a decade before I was born’.

Baroness Kramer (Lib Dem) raised her concern about the distribution of the tax burden and asked why the government has chosen to use the threshold than the tax rate to increase income tax. She elaborated further that by utilising the tax rate, the government could target the “higher level of tax against those with the broadest shoulders most able to carry it”. Freezing the threshold has led to the higher tax rate for many individuals with middle incomes.

Baroness Penn defended the income tax system as ‘highly progressive’ and noted that the top 5 per cent are expected to pay nearly half of all income tax in 2023-24, and the top 1 per cent will pay more than 28 per cent of all income tax.

Lord Leigh of Hurley (Con) suggested that one tax that goes up because of inflation is receipts from inheritance tax. He said that, according to the latest figures, inheritance tax receipts increased by 14 per cent last year. He urged government to address the threshold rates for inheritance tax immediately.

The minister highlighted that inheritance tax makes a vital contribution to public finances, and said that the government introduced additional allowances for people in certain circumstances to pass on up to £1 million to their direct descendants in 2010.

The Labour peer, Baroness Chapman of Darlington, brought up the position of non-doms and changes to pensions tax, and said the people who work hard and pay their taxes are frustrated that the government treats them differently. In response, Baroness Penn said that the pension changes have been made to keep experienced professionals in the public sector workforce. She added that the government has raised the personal allowance by the largest single amount to help people who are currently facing challenges with the cost of living.

With the final question, Lord Brownlow of Shurlock Row (Con) raised the not entirely related issue that, according to the Competition and Markets Authority (CMA), consumers are charged 6p a litre more than wholesale prices justify. He asked if the government thinks they should be taxed at more than the current rate.

The minister stated that the government will take the findings of the CMA very seriously and “put in place a system to ensure that we do not see future excess profits in a similar way.”

You can read the full debate here.