Scrap income tax bands to give £1,100 back to middle income tax payers

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New system of income tax proposed in a new think tank report published today could give money back to 84 per cent of tax payers without costing government a penny

A revolutionary new tax system proposed by IPPR would give money back to most tax payers, 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 per cent 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 per cent of households pay 35 per cent of their gross income in tax, compared with under 30 per cent for the next poorest.

IPPR say that their proposals would ensure the richest pay their fair share as the richest 10 per cent 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 per cent.

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 per cent, since they pay both income tax and national insurance. Under IPPR’s system this could fall to less than 11 per cent.

The proposed system redistributes to 84 per cent 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 per cent 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 per cent increase).

IPPR’s system would mean moderate tax increases for the richest 16 per cent. 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 per cent 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?”