August Newsletter

Welcome to the August 2014 Newsletter from Easterbrook Eaton

Glorious sunshine and the start of the Commonwealth Games have created a feelgood factor in recent weeks, and there has also been a lot of very positive economic news. However, one potential result of economic growth is the phenomenon of 'fiscal drag', whereby more and more income creeps into the higher rate tax bands.

Here's our August round-up of the latest tax and business developments…

Could one in three workers eventually be paying higher rate income tax?

Official forecasts suggest that if current trends continue some 10 million people will have been pulled into the higher rate income tax threshold by 2033, according to an analysis by The Telegraph.

The newspaper claims that 'one in three workers will be a higher rate taxpayer within two decades as the 40p band becomes the “norm” for millions of the middle class', following the publication of a report by the Office for Budget Responsibility forecasting the medium-term effects of 'fiscal drag'.

Fiscal drag as defined here by the OBR is the process by which the average tax rate rises if allowances and thresholds are indexed to prices rather than earnings, resulting in more taxpayers' income falling into higher tax bands. Current Government policy is to uprate tax thresholds and allowances in line with inflation, but because earnings are expected to rise more quickly than prices in the long term, more and more income moves into higher tax bands and the average tax rate rises steadily.

The OBR forecasts estimates the number of people who will pay the higher rates of income tax if the current £41,865 threshold rises in line with inflation. Currently, 4.6m people pay the 40p higher rate and 300,000 pay the 45p additional rate for those earning more than £150,000. By 2033 the OBR forecasts 9.2 million people will pay the higher rate and 1.7m the additional rate - more than twice as many as at present.

Furthermore, The Telegraph argues that the OBR forecast is likely to be an underestimate, since the Chancellor has restricted rises in the 40p threshold to below the level of inflation. From this year it will go up by a flat 1% until 2016, well below the current CPI inflation measure.

Chancellor George Osborne has resisted Conservative calls to increase the 40p threshold to take into account the rising incomes of 'middle class' workers such as teachers, senior nurses and other professionals not normally regarded as high earners, preferring instead to concentrate on raising the tax-free personal allowance in his Budget statements.

However, this analysis of fiscal drag is likely to give more ammunition to those in the party who want to see the higher rate threshold raised. Former chancellor Lord Lamont said: 'For the next parliament, raising the higher rate threshold should be a top objective for a Conservative government. It makes no sense that a rate that Nigel Lawson intended to be for the richest people in the country is now being paid by secretaries and middle management.'

When Lord Lawson introduced the 40p band twenty-five years ago, only one person in 20 was caught by it, while today it is just over one in six.

The OBR forecast does offer an alternative path. It calculates that if the higher rate threshold were to rise in line with earnings instead of inflation, 4.6 million fewer people would be dragged into it, in its own words 'effectively switching off fiscal drag.'

Energy in the UK: cost, complaints and competition

According to a forecast by the National Grid, the price of electricity for businesses and homes could double in 20 years. With the current wholesale price of electricity below £50 per megawatt hour, one 'high case' scenario sees the price going over £100 per megawatt hour by 2035.

Reports indicate that the cost of energy in real terms has already increased by 20% since 2009, with the National Grid citing the closure of numerous coal power plants as the reason.

This is being reflected in purchasing choices and complaints raised by consumers to the independent ombudsmen. Figures show that 22,671 official complaints were made in the first six months of 2014 - 84% of those were concerning energy bills.

Lewis Shand Smith, chief energy ombudsman, said: 'The spike in complaints is in part a result of the rising cost of living, but also as a result of consumers becoming more aware of their rights and feeling more empowered to act and fight for a fair deal. Addressing these concerns is crucial to restoring consumer confidence in this sector'.

In addition, 'Big six' energy supplier SSE has lost more than 110,000 customers since pledging a price freeze just a few months ago. Their domestic gas and electricity customers were reported down from 9.1 million to 8.99 million.

SSE group managing director, Will Morris, said: 'We operate in a very competitive market and, as you would expect, different supply companies take different approaches and have different propositions'.

Watchdog Ofgem proposed a full inquiry into the way the industry is run earlier this year, due to increasing prices - an issue SSE tried to sidestep with their price freeze promise until 2016.

The ongoing battle between the big six energy suppliers looks set to continue well into the future, which could mean eventual better value for their customers but Mark Todd, director of energyhelpline.com, said: 'Households are struggling with sky high energy prices and research shows that millions are now fearful of turning on the heating even when very cold'.

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