Before turning to higher rates of income tax, I must deal with the problem which arises at the upper end of the basic rate band. If I took no action this year, people earning less than one and a half times average earnings would find themselves moving out of the basic rate band into liability to the higher rates of tax. In two years inflation has already almost doubled the number of people paying tax at the higher rates, from 750,000 in 1974–75 to 1·4 million in the current year; and, if I took no action, the number would rise this year to 1·8 million.
I propose, therefore, to extend the basic rate band by £1,000, making the entry point to higher-rate liability £6,000. As a result, 800,000 people who would otherwise be paying tax at the higher rate will now not do so.
I now come to the rates of income tax above 35 per cent. These apply to successive bands of taxable income which will now start at £6,000. I want to produce a more rational sequence of bands above this level. The first higher rate band—charged at 40 per cent. tax—is only £500 long and I propose to extend it to £1,000. The next three bands will remain £1,000 long but the following band—charged at 60 per cent.—which I had to shorten last year from £2,000 to £1,500, I propose to restore to £2,000. I propose to make the following two bands £2,000 long and the 75 per cent. band £5,000 long, as it is now. Thus the maximum rate will be reached at £21,000—£1,000 higher than this year.
The effect of these changes will be to raise the thresholds for the higher rate bands by between £1,000 and £2,000. This will benefit all higher-rate taxpayers, but those in the area of middle management will gain proportionately more than those at the very top.
I should have liked to have been able to do more for senior managers, as I should have liked to do more for those at the bottom of the earnings scale. But I have felt it necessary this year to concentrate relief where it is most needed. I believe that the improvements I have announced strike a reasonable balance between the needs of the various groups which most require relief immediately.
The total cost of this whole group of measures in the field of personal taxation is £1,290 million in a full year. I propose that all these income tax reliefs should take effect immediately. The benefit will generally be felt in pay packets in May.