Latest news with #Gordon Brown
Times
2 days ago
- Business
- Times
How the top tax rate became a middle-class problem
When Gordon Brown's Labour government introduced a new top rate of income tax, fewer than one in every hundred taxpayers had to worry about it. However, the number of workers liable for the additional rate is predicted to surge to 1.7 million by 2030 — more than a seven-fold rise over two decades. The corrosive combination of inflation and frozen tax thresholds means that hundreds of thousands more earners will be dragged into paying the 45p in the pound rate, and will have to grapple with a host of other tax hits that come with it. The additional rate of income tax is 45 per cent on income above £125,140. When introduced in 2010, it was set at 50 per cent on income above £150,000 and about 236,000 people paid it. But HM Revenue & Customs estimates that 1.2 million taxpayers will pay the additional rate this year, and its internal forecasts, seen by Money, show that the taxman expects 1.5 million people to be paying the 45p tax rate by 2028. By 2030 that figure will hit 1.7 million, according to analysis by the wealth manager Quilter, meaning an extra half a million people will be dragged above the threshold in the next five years. 'The number of people paying the additional rate of income tax has risen exponentially since thresholds were frozen,' said Shaun Moore from Quilter. The top rate of income tax was reduced to 45 per cent in 2013 under the coalition government. Kwasi Kwarteng tried to abolish it outright in his doomed mini-budget of 2022, but in 2023, the threshold was reduced to £125,140 by Jeremy Hunt to be in line with the point at which you lose all your tax-free allowance. This, combined with the freeze on income tax thresholds since 2021 and rising salaries, has dragged many more into the top tax band. By 2030 the proportion of total taxpayers paying the top rate will have jumped from 0.7 per cent to more than 4 per cent. Had the original £150,000 threshold risen with inflation since 2010 it would be £232,000 today. If the present £125,140 threshold had kept pace with inflation since 2023 it would be £132,000 today. 'When the additional rate was introduced, it was meant for the very highest earners. That's clearly no longer the case,' said Katherine Waller, the co-founder of the wealth manager Six Degrees. 'Since then, the threshold has been significantly reduced. The fact the rate itself has fallen is a minimal concession in that broader context. A far greater proportion of the workforce is now captured — far beyond what was originally intended.' • What is a 'comfortable' salary these days? Waller added that many families were still adjusting to a 'new normal' of higher costs and rates. She added: 'In theory, the additional rate should apply to those with significant earnings and the corresponding lifestyle. In that context, a salary of £125,000 doesn't stretch as far as it once did.' Polling by the think tank More In Common found that while overall life satisfaction was highest among those earning more than £100,000 a year — on average they gave their satisfaction 9.1 out of 10 — only 46 per cent said they felt 'very comfortable' financially. Another 46 per cent described themselves as 'relatively comfortable', while 7 per cent said they could cover essentials but had no room for luxuries. Adrian Anderson from the mortgage broker Anderson Harris said: 'The general feeling I get now from clients earning £125,140 a year is that they feel worse off in real terms than they were in 2015. People face higher taxes, higher interest rates and higher basic living expenses, so they have less disposable income.' He said that even very wealthy clients were now thinking twice about stretching their borrowing when it came to housing costs. He added: 'I used to see additional-rate taxpayers sending children to private school, but now it feels like both parents have to earn a six-figure salary to manage school fees and higher mortgage costs.' Once your income passes £125,140, you lose nearly half of any pay rise or bonus. That's because your marginal tax rate, what you pay on any extra £1 earned, is 47 per cent — 45 per cent income tax and 2 per cent national insurance. If you're also repaying a student loan, you typically pay another 9 per cent, bringing your total marginal rate to 56 per cent. At the same time, various forms of government support and tax reliefs disappear above certain income levels. They are mostly gone by the time you become an additional-rate taxpayer. Child benefit, worth £26.05 a week (£1,354.60 a year) for a first child and £17.25 a week (£897 a year) for other children, starts to be lost when one parent earns more than £60,000 a year. You lose it entirely once one parent earns £80,000. Tax-free childcare — where the government tops up £2 for every £8 spent on certain kinds of childcare, including nursery, childminders and after school clubs — is worth up to £2,000 per child a year. Entitlement is lost once one parent earns more than £100,000 a year. Families where one parent earns more than £100,000 also lose access to 15 or 30 hours of government-funded childcare during term time. Children aged nine months up to three years lose all their free childcare, and children aged three and four get only 15 hours instead of 30. • How much one year of Labour has cost you The average cost of a full-time (50 hours a week) nursery place for a child under two in England is £341.36 a week, according to the children's charity Coram. This means 30 hours of free childcare across 38 weeks of term time is worth £7,783 on average. Your personal allowance — the £12,570 chunk of income you can earn tax-free each year — starts to be cut once you earn more than £100,000 a year too. For every £2 earned above the threshold, you lose £1 of allowance. It's fully withdrawn by £125,140, when you begin paying the highest rate of tax. This gives workers earning between £100,000 and £125,140 a marginal income tax rate of 60 per cent. With 2 per cent national insurance and 9 per cent student loan repayments, the effective marginal rate could be 71 per cent, leaving you just 29p from every extra £1 earned. And that's before you factor in any lost childcare help. Additional-rate taxpayers also get no personal savings allowance, meaning they pay income tax on any interest from savings, unless the money is held in an Isa. Higher-rate payers can earn £500 a year in interest tax-free and basic-rate payers £1,000. The income you can earn each year from dividends before paying tax has also slashed from £2,000 in 2022-23 to £500. Additional-rate taxpayers pay 39.35 per cent on anything they make over this threshold (compared with 33.75 per cent for higher-rate taxpayers and 8.75 per cent for basic-rate taxpayers). A similar clampdown has happened on capital gains tax (CGT), which is charged on profits made from the sale of most assets. You used to be able to make up to £12,300 a year tax-free, but this was cut to £6,000 in April 2023 and halved again in April 2024. Higher and additional-rate taxpayers pay 24 per cent CGT on gains made above £3,000 a year, while basic-rate taxpayers pay 18 per cent. The final blow comes when earnings hit £200,000. At that point, workers begin to lose their £60,000 annual pension allowance, the maximum they can contribute to a pension each year while still receiving tax relief. The Treasury said: 'We are protecting payslips for working people by keeping our promise to not raise the basic, higher or additional rates of income tax, employee national insurance or VAT. That's the Plan for Change — protecting people's incomes and putting money into people's pockets.' • 'My reward for being a good saver? A £1,000 tax bill' Many high earners mitigate the tax burden by keeping their taxable income below key thresholds. This is usually done by saving more of your income into a pension, because all the thresholds above are based on your 'adjusted net income', which is your annual earnings (including bonuses) minus pension contributions and donations made to charities through Gift Aid. Jason Hollands from the wealth manager Evelyn Partners said additional-rate taxpayers often sacrificed bonuses or pay rises in exchange for increased employer pension contributions. 'Pension contributions are exempt from income tax and national insurance,' he said. 'This can help keep earnings below £125,140.' In many cases, it's worth going further. The most punitive cliff-edge comes at £100,000, where multiple benefits are lost and the personal allowance begins to reduce. As a result, some additional-rate taxpayers keep their income below this level through large pension contributions. 'It all depends on your living costs and personal circumstances,' said Chris Etherington from the accountancy firm RSM UK. 'If you're on £130,000 a year and have young children, it may make sense to cut your taxable income to below £100,000 to keep free childcare hours and your tax-free allowance. But it could make day-to-day cash flow tighter.' Calculations from RSM UK show that someone earning £130,000 would pay £44,703 in income tax. If that person paid enough into their pension to keep their income below the £100,000 threshold, they would pay £11,271 less in income tax. If they had a young family they could actually end up with more disposable income as a result because they would keep their childcare benefits. The 30 free childcare hours for two children under three would be worth £15,566 a year on average if they were in full-time, and tax-free childcare would be worth £4,000. Combined with the tax saved, that's £30,837, more than making up for the £30,000 saved into their pension, which has the potential to be boosted by tax relief and employer contributions. If income from savings, investments or property are pushing you over the £125,140 threshold and you are married or in a civil partnership, it could be worth transferring ownership of the assets to your partner if they are in a lower tax bracket. Transferring assets between spouses is tax-free, and so it could reduce the household's overall tax bill. Sean McCann from the wealth manager NFU Mutual said: 'One other area not to overlook is gifts made to charity via Gift Aid. These reduce your income and, in some circumstances, can help restore some or all the tax-free allowance and lower your tax bill.' Other tax-efficient investment options include venture capital trusts (VCTs) and enterprise investment schemes (EIS). These are government-backed schemes designed to encourage investment into small, early-stage companies. If you hold a VCT for five years and an EIS for three, you can claim 30 per cent income tax relief for each year. However, these are high-risk, niche products, so it's worth seeking financial advice before you make any moves. Hollands added: 'A six-figure salary has less wow factor than it did in the past, and a great many additional-rate taxpayers won't feel especially wealthy because the cost of living, higher mortgage costs and growing tax burden mean that the disposable income that can be used on the nice things in life won't be what it was in the past.' Suman Paul earns more than £126,000 a year, which should make him an additional-rate taxpayer. But Paul, an NHS consultant from Warrington in Cheshire, avoids the 45 per cent top rate of tax by making sure his income stays below the £100,000 cliff-edge. This means he keeps his tax-free personal allowance and still gets tax-free childcare for his daughter. 'Once you cross the £100,000 mark you start getting into marginal tax rates of 60 per cent, so that is one very inefficient tax trap that I want to avoid,' said Paul, 39. 'My daughter is also three and a half so we have to pay for nursery. We use the government's tax-free childcare scheme that gives you £2 for every £8 you spend. If we lose that, it would cost us more than £1,000 a year.' To manage his income, Paul pays for a car through his employer via salary sacrifice. It costs him £6,000 a year, which gets deducted from his salary pre-tax and reduces his taxable income. He also pays about £1,000 a month into his NHS pension and puts extra into his self-invested personal pension to bring his adjusted net income down further. Despite having an income that pushes him above the additional-rate threshold, Suman doesn't feel as if he lives a life of luxury. He said: 'It's a middle-class life. I can afford my mortgage, but my take-home pay does not feel like a lot. 'After paying all the fixed costs — mortgage, childcare, pension, car costs, bills — our disposable income is about £1,000 a month. And my wife is also a working professional. If I was a single earner, it would be much harder.'
Times
3 days ago
- Business
- Times
Labour should atone for its gambling sins
It was an indelible stain on New Labour: the beaming culture minister Tessa Jowell placing chips on a roulette table as she announced that the government's solution to urban decay was 40 supercasinos, one in each of our most blighted cities. Liberalising gambling wouldn't just bring investment, jobs and tax revenue, it was fun! Modern, grown-up, free market, vice-is-nice fun — along with newly licensed 24-hour pubs and sexy high-street lap dancing clubs. Those concerned about organised crime, gambling addiction, families in debt or the sheer immorality of rapacious US casino cartels extracting hard-earned wages from the poor of Leeds or Great Yarmouth were, according to the late Jowell, anti-American 'snobs', queasy about Vegas gaudiness, po-faced Puritans. A supercasino, she argued, was no worse for a neighbourhood than a multiplex or a bowling alley. How the roulette wheel spins. Listening to Gordon Brown explain his call to increase taxes on gambling to raise the £3.2 billion required to abolish the two-child benefit cap felt like an atonement, or maybe historical revenge. He wants the filthiest money in all capitalism to be repurposed for the purest ends: removing children from poverty. • Rachel Reeves may raise gambling tax to axe two-child benefit cap The Blairites didn't consult Brown, then chancellor, on their supercasino wheeze, knowing this austere son of the manse would be appalled. Indeed, he sided with the churches and the anti-addiction lobby that fought the number down from 40 to eight and finally just one, mooted for Manchester. Then as soon as Brown became PM, he killed off even that and demoted Jowell. Even so, the 2005 Gambling Act's liberalising force brought £100-a-pop slot machines to every bookies shop, incessant TV betting ads and soaring rates of problem gambling. It also enabled a gazillion supercasinos — it's just that they're all online. It is these that Brown wishes to target hardest by increasing the tax rate paid on 'remote gaming' from 21 per cent to 50 per cent. He and the IPPR think tank, which authored a report, point out that other jurisdictions already impose higher levies: 40 per cent in Austria, 50 per cent in Pennsylvania, 57 per cent in Delaware. Moreover other UK 'sin' taxes on products generating health or social problems are far higher: 80 per cent on tobacco, 70 per cent on Scotch. Problem gambling leads to harms estimated to cost society £7.2 billion — family breakdown, debt, catastrophic mental health problems, suicide — yet betting is even exempt from VAT. Gambling companies prey upon the lonely, bored and desperate, luring solitary people on phones or laptops into squandering savings, Christmas funds or benefits. An online casino does not even involve small talk with a croupier, an online slot machine is just a bunch of pixels and pings. The IPPR proposals are less hard on real-world gambling, which has some social dimension, and will not impose further levies on horse racing, where bets are already taxed higher than on sports like football. • Move defence budget outside fiscal rule, says Gordon Brown Online casino gamblers are, unsurprisingly, six times more likely to become addicts. The top 5 per cent of gamblers generate 86 per cent of profits, and gaming companies allocate them VIP managers, who befriend and groom them into spending more, offering birthday treats or free bets. Lately, as the market for male gamblers has grown saturated, they've targeted women with games like Double Bubble, which use images of soap stars, pastel colours and 'feminised' graphics. Rachel Reeves says she was already reviewing taxes on the online gambling industry before Brown's intervention. Who can blame her, faced with a £40 billion deficit and a furious electorate? A workforce hit by inflation and stagnant wages will not tolerate higher income tax due to the government's own failure to cut a bloated welfare bill and millions spent on migrant hotels. But online gambling companies, almost everyone can agree, are parasites feeding on the vulnerable and sad. Why not tax them to hell? The risk is in killing off a golden goose when so many others have flown abroad. We can be revolted by the amoral antics of the porn star Bonnie Blue et al on OnlyFans but note that this highly successful British start-up pays more corporation tax than Starbucks, eBay and Apple combined. Likewise the Bet365 corporation is among Britain's biggest taxpayers, putting an estimated £376 million into the Treasury, while its chief executive Denise Coates is among the country's highest individual tax payers. • Why Rachel Reeves isn't panicking about tax — yet The IPPR reckons that since gambling duty is charged on a firm's surplus after paying out winnings, companies will just make up for higher taxes by worsening the odds for punters. But at what point will they feel cheated and look elsewhere? Others fear companies will maintain their profits with even more aggressive marketing, so those paying to alleviate child poverty could well be those impoverishing their own children with every bet. Besides, should £3.2 billion, small change compared to the deficit, be used to lift the two-child cap, which half of Labour voters and six in ten voters want to keep? The prevailing tough-hearted argument is that struggling working parents with one or two children should not be expected to bail out those who choose to have large families they cannot support themselves. Rather than throwing its few precious gambling chips into the bottomless benefit budget, the government should feed them into Sure Start-style early years interventions or childcare to help parents back into work. Before her death in 2018, Jowell admitted the Gambling Act was among her greatest regrets. Its legacy is evident in the betting logos on every football strip, the young men seduced by free £10 wagers to blow their student loans, in longer queues for food banks. It was a law passed by thoughtless Cavaliers but we live now in Roundhead times.
Telegraph
4 days ago
- Business
- Telegraph
Reeves could unlock £30bn with defence loophole in fiscal rules
Rachel Reeves could give herself an extra £30bn headroom next year if she follows Gordon Brown's advice to take increased defence spending outside the fiscal rules. The former prime minister said the Chancellor should follow Germany and declare that 'exceptional' increases in defence spending can be paid for by borrowing more. This is currently banned under Ms Reeves's fiscal rules, which say borrowing should never pay for day-to-day spending, and that debt should fall as a share of the economy by 2030. The Institute for Fiscal Studies (IFS) says the defence spending change could give the Government another £30bn next year. However, the economic think tank warned it would increase borrowing costs for households with mortgages. It comes as Ms Reeves comes under huge pressure to figure out how to fill a £50bn hole in the public finances, with tax rises seemingly increasingly likely. Mr Brown told the BBC Radio 4 Today programme that he would like the Chancellor to scrap the two-child benefit cap, raising the money to do so by increasing taxes on the gambling industry. He said another option was to treat a commitment to ramping up defence spending to 5 per cent of GDP by the 2030s as 'exceptional' and as 'outside the fiscal rules'. 'When you come to the fiscal position, there is one thing that has happened over the last few months which has been quite unprecedented: to spend 5 per cent on defence expenditure as we want to spend by 2030,' said the former prime minister. 'But this is a Nato initiative, this is a European initiative, we should be doing this jointly, we should have either jointly issued bonds or a Nato defence fund and we should be sharing the cost across the Continent. 'That should be regarded as something extraordinary and exceptional, outside the fiscal rules and that would create the kind of headroom that Rachel Reeves needs.' Ben Zaranko, associate director of the IFS, said that if defence spending increased from 2.5 per cent of GDP to 3.5 per cent, this would be equivalent to around £30bn. He said: 'If the UK needs to spend a lot more on defence, and it needs to do so quickly, there could be a case for borrowing more in the short term to make that happen, and to smooth the path towards the new higher spending equilibrium. 'Some sort of one-off joint bond issuance with Europe or Nato could be part of that. 'But that extra borrowing wouldn't be free: we would expect it to push up borrowing costs for the Government and households with mortgages. 'And, importantly, more borrowing cannot be a permanent solution. Ultimately, if we need to spend more on defence on a recurring, permanent basis, we will need to either raise more in tax or spend less on something else.'
Telegraph
5 days ago
- Business
- Telegraph
Gordon Brown's intervention shows Rachel Reeves is out of ideas
What exactly is Gordon Brown up to? Having largely kept his counsel in recent years, the former prime minister took to the airwaves on Thursday morning to set out what was effectively an alternative budget. Among the ideas he was pushing were ramping up tax on the gambling industry to pay for lifting the two-child benefit cap; ignoring fiscal rules when it comes to defence spending, and teaming up with other European countries to keep procurement costs down. If you understand the way Westminster works, it would be tempting to think this was Rachel Reeves using an elder statesman to 'pitch roll' her own ideas – in other words using a stooge to test the public's reaction so she could deny all connection with it if it went down badly. If anything though, the opposite is true. Ms Reeves did not ask Mr Brown to put the proposals out there, and his intervention was largely unhelpful. Mr Brown may have been a controversial prime minister but he was broadly respected as chancellor, the role he filled for 10 years. His favourite word was prudence, a word no one associates with Ms Reeves as she taxes the economy towards oblivion. The problem, then, for Ms Reeves is that having a predecessor coming up with novel ideas reminds voters how few she has of her own, and just how little room she has for manoeuvre after killing off growth with her jobs tax. Mr Brown did not spring his media appearance on Ms Reeves – he is far too polite to do that. I'm told they spoke at the weekend, when Mr Brown set out what he was going to say, and that Ms Reeves did not try to dissuade him. Ms Reeves has enormous respect for Mr Brown, who is something of a political idol for her, but the Treasury's private response to his appearance on BBC Radio 4's Today programme and a column in The Guardian is telling. Treasury insiders have questioned the figures quoted by Mr Brown in his miracle cure for child poverty. Mr Brown used figures from a report by the Institute for Public Policy Research (IPPR), which said that the betting industry only paid £2.5bn in tax, and that another £3bn could be raised by 'taxing it properly', in Mr Brown's words (money that could be spent on lifting the two-child benefit cap). A betting industry source told The Telegraph the true amount of tax paid is £4bn, and one government insider questioned whether the IPPR's figures were 'credible' and suggested think tanks needed better scrutiny. Ms Reeves has launched a consultation on gambling taxes and on child poverty and Mr Brown, a lifelong campaigner for reducing child poverty, has submitted detailed proposals to both. Ms Reeves does not, however, see the two issues as inextricably linked. One Treasury source said that no government could be expected to indulge in a game of 'whack a mole' – the phrase that irritated politicians tend to reach for when they are asked how the Treasury is going to solve this problem or that. The same source said: 'We have done breakfast clubs, free school meals, there is a child poverty taskforce later in the year and we are not going to pre-empt that.' On the issue of putting defence spending outside of Ms Reeves's fiscal rules, the same source pointed out that while Germany has made such a move, it can afford to do so because it has much lower levels of debt, and that however Ms Reeves tries to raise money for increased defence spending, 'borrowing is still borrowing'. As for Mr Brown's suggestion that European members of Nato should use their combined spending power to bring down the costs of procurement, a source close to Ms Reeves said: 'Rachel has been leading the work in Europe on how European countries can do more together.' Ms Reeves and Mr Brown are 'close and speak a lot', but that is not the same as saying they are on the same page. The brutal truth is that every time Mr Brown offers up ideas about how Labour could solve society's problems, a comparison is automatically made in the public's minds that only makes Ms Reeves look feebler.
The Independent
5 days ago
- Politics
- The Independent
UK hasn't seen poverty like this for 60 years, says Gordon Brown in call to scrap two-child benefit cap
Britain has not seen poverty this bad for more than half a century, Gordon Brown has warned, urging Sir Keir Starmer to scrap the two-child benefit cap at the next budget. The former prime minister and Labour chancellor – who said 'we are dealing with a divided Britain' and a 'social crisis' - backed reforms to gambling taxes in order to generate the £3.2bn needed to scrap the cap. Mr Brown said the gambling industry is 'under taxed', throwing his weight behind a report from The Institute For Public Policy Research (IPPR) which said that around half a million children could be lifted out of poverty through the reforms. The two child benefit cap, which was imposed by Tory former chancellor George Osborne, prevents parents from claiming benefits for any third or subsequent child born after April 2017. Speaking to BBC Radio 4's Today programme, the former Labour prime minister issued a stark warning about the state of Britain after 14 years of austerity under the Conservatives, urging the current government to take action. 'Look, we're dealing with a divided Britain. We're dealing with a social crisis. We're dealing with poor children that are living what you might say are separate lives… we're talking about children that are far from the mainstream, and something's got to be done', he said. 'This problem is getting worse. It's going to worsen over the next few years, because there's a built-in escalator in the poverty figures, because of the two-child rule.' He added: 'I live in the constituency in which I grew up. I still live here. I see every day this situation getting worse, and I did not think I would see the kind of poverty I saw when I was growing up, when we had slum housing, when we had traveling people coming to my school. 'This is a return to the kind of poverty of 60 years ago, and I think we've got to act now, and that's why it's urgent that we take action in this budget to deal with the under taxed gambling industry, to pay for half a million children to come up.' Speaking to ITV, he added: 'You cannot have a situation where under a Labour government, child poverty numbers just go up and up, and up.' Sir Keir Starmer is thought to personally be in favour of scrapping the cap, but after a number of expensive U-turns and a new report from top economists warning that the chancellor is facing a £51bn black hole in the public finances, there are growing questions over how the prime minister would be able to fund such a move. But Mr Brown urged the government not to 'leave unaddressed something that is a cancer in our society, which is children growing up and going to school ill clad and hungry.' MPs from across Labour have repeatedly urged the prime minister to scrap or ease the limit amid growing concern over the direction of the party. Critics of the policy say removing it would be the most effective way of reducing child poverty amid warnings that as many as 100 children are pulled into poverty every day by the limit. However, it is thought that a decision on the cap won't be taken until the government publishes its child poverty strategy, which has now been delayed until the autumn. Mr Brown said he understands that Rachel Reeves has 'inherited a very difficult fiscal situation, but warned: "At the budget the government has one straightforward choice: gambling will not build our country for the next generation, but children free from poverty will." His comments came after an IPPR report urged the government to look at measures which could raise £3.2 billion from changes to how gambling is taxed, suggesting an increase on taxes on online casinos from 21 per cent to 50 per cent and raising those on slots and gaming machines from 20 per cent to 50 per cent. The organisation also proposed raising general betting duty on non-racing bets from 15 per cent to 25 per cent which it said would bring other sports in line with the rates paid by horseracing. The IPPR said raising gambling taxes like this would be unlikely to reduce overall government revenue. But a spokesperson for the Betting and Gaming Council rejected the 'economically reckless, factually misleading' proposals which 'risk driving huge numbers to the growing, unsafe, unregulated gambling black market, which doesn't protect consumers and contributes zero tax'. They added: 'Further tax rises, fresh off the back of government reforms which cost the sector over a billion in lost revenue, would do more harm than good – for punters, jobs, growth and public finances.'
