Scrap income tax bands to give £1,100 back to middle income tax payers
New system of income tax proposed by IPPR could give money back to 84% of tax payers without costing government a penny
A revolutionary new tax system proposed by IPPR would give money back to most tax payers (84%), while still raising just as much revenue as the present system, according to a new report for the IPPR Commission on Economic Justice published today.
The proposed new tax system would also give future policy makers the opportunity to raise significantly more revenue from income tax to fund public services. IPPR modelling also shows that policymakers could give 75% of taxpayers a small tax cut while also raising between £6 and £16 billion more per year. This could, for example, plug the entire NHS annual funding gap, which estimates suggest could be between £5 billion and £15 billion by 2020/21.
The new system would make tax as a whole more progressive. It would merge income tax and national insurance together and tax bands would effectively be abolished for everyone except those on the very highest incomes. Everyone earning above a new tax-free allowance and below £100,000 would have their own personal marginal tax rate, which would rise gradually the higher their income, up to a top rate of 50%. As a result, everyone earning less than £44,400 could see their average tax rate fall.
This system would also be fairer for the lowest paid, making work more rewarding by reducing marginal tax rates. It would have the added benefit of improving work incentives by making sure the lowest paid keep significantly more of what they earn than today.
The new report further shows that:
The poorest pay more in tax than anyone else: The current tax system as a whole is regressive. The poorest 20% of households pay 35% of their gross income in tax, compared with under 30% for the next poorest.
The Government’s current plans for income tax will make this worse. Increasing the personal allowance to £12,500, and the higher rate to above £50,000, will mean that post-tax incomes will rise five times faster for the richest 10% compared with the poorest 10% by 2020/21.
IPPR’s proposals would ensure the richest pay their fair share. Under IPPR’s proposals, the richest 10% would end up paying a larger proportion of their income in total taxes than anybody else.
IPPR’s proposals are fairer for the lowest paid, making work more rewarding by reducing marginal tax rates. The current tax and benefit system produces weak work incentives at the bottom, where they are most needed. For example, a main earner from a family on universal credit can see 75p out of every extra pound of income taken away. IPPR’s tax reforms would increase take home pay for these earners by as much as 10p in the pound, an increase of 40%.
IPPR’s system would also mean lower tax rates for most people. For those not on means tested benefits, the true marginal rate of tax for most people with salaries over £11,500 is 32 %, since they pay both income tax and national insurance. Under IPPR’s system this could fall to less than 11%.
The highest income tax rates under IPPR’s system would also be lower than under the current system. The highest effective marginal rate paid by UK tax payers is 62% on incomes just over £100,000, after taking into account income tax, national insurance and the withdrawal of the personal allowance. Under IPPR’s proposal, the highest rate of tax would be capped at 50%.
IPPR’s system redistributes to 84% of income tax payers. Overall, IPPR’s proposals would increase post-tax incomes most for middle and low earners, and everyone earning less than £44,400 would see their take-home pay increase. Someone on median income (around £24,700 per year before tax) would see take-home pay rise by more than £1,100 per year (a 5% increase). Someone at the 25th percentile (around £17,300 per year before tax) would see their take-home pay rise by more than £1,000 (a 6% increase).
- IPPR’s system would mean moderate tax increases for the richest 16%. Under IPPR’s proposals, the tax burden could rise for everyone earning over £44,400. But it would rise only gradually. For example, people with incomes between £100,000 and £200,000 would be asked to contribute just 3% more of their pre-tax earnings.
Alfie Stirling, IPPR Senior Economic Analyst, said:
“The UK’s system of taxing incomes is not progressive enough, too inefficient and poorly equipped to raise the revenue that will almost certainly be needed to meet the public spending challenges of the 21st century.
"By combining income tax with national insurance, and replacing most tax bands with a constant, gradual increase in the marginal rate of tax, our proposal would allow policy makers to give significant sums back to low and middle earners while still raising funds to plug deficits in our public services."
Tom Kibasi, Director of IPPR and Chair of IPPR’s Commission on Economic Justice said:
“We propose a tax system for the 21st century, fit for the age of the internet not the abacus. The old system of tax bands pre-dates modern computing and should be consigned to the 20th century. The tax system is ripe for reform.
“This bold modernisation of the tax system will promote economic justice by making sure that everyone pays their fair share—no more, no less. It reduces anomalies and gives a tax cut to more than 80% of people. The question for politicians isn’t whether they should adopt this proposal, but how can they justify sticking to the obviously flawed status quo?”
Sofie Jenkinson, 07981023031, [email protected]
Florence Burton, 020 7470 6154, [email protected]
The full IPPR report Tapering over the tax: Reforming taxation of income in the UK will be published at 00.01 Monday 5th March at https://www.ippr.org/research/publications/tapering-over-the-tax
Indirect taxes are less regressive when assessed as a proportion of expenditure rather than income, such that it is possible to argue that the tax system as a whole is progressive when direct taxes and indirect taxes are analysed as a proportion of income and expenditure, respectively. The benefit to this approach is that it takes some account of income across a lifetime, since in reality people can borrow or spend savings to meet consumption. But there are also disadvantages. For example, it requires assessing different taxes in ways that are not on a like-for-like basis. It also does not take account of inheritance, either received or given away, or that some people are constrained in how much they can borrow. It also assumes that the question of whether someone has to use credit, as opposed to income (past or present), to finance present spending is not important to progressivity, which is potentially controversial.
Figures for the median and 25th percentile refer to all income tax payers. Figures will be lower for the population as a whole.
Costings and distributional impacts of IPPR proposed tax reforms were estimated using the IPPR tax and benefit model based on survey data from the 2015/16 Family Resources Survey and uprated to 2017/18 using ONS and OBR data and assumptions.
IPPR aims to influence policy in the present and reinvent progressive politics in the future, and is dedicated to the better country that Britain can be through progressive policy and politics. With nearly 60 staff across four offices throughout the UK, IPPR is Britain’s only national think tank with a truly national presence. Our independent research covers the economy, work, skills, transport, democracy, the environment, education, energy, migration and healthcare among many other areas.
The IPPR Commission on Economic Justice is a landmark initiative to rethink economic policy for post-Brexit Britain. The Commission brings together leading figures from across society to examine the challenges facing the UK economy and make practical recommendations for reform. Its Interim Report, Time for Change: A New Vision for the British Economy, was published in September 2017.