Tax increases on the way for 80% of Islanders

The Treasury Minister has warned that 80% of Jersey households might pay more tax next year
An increase in the marginal rate of income tax is being considered for 2016
The move would raise £8m from lower and middle-income earners
With a projected deficit of £125m by 2019, States have to find savings

EIGHTY per cent of households could be paying more tax next year in order to claw back £8 million from lower- and middle-income earners.

Treasury Minister Alan Maclean says that he is considering an increase in the marginal rate of income tax, to be included in the next Budget for 2016 – the first indication that taxpayers will be hit directly in the pocket by the current crisis in States finances.

Jersey’s personal tax system is based on a standard 20% rate, with deductions and allowances.

However, to protect lower and middle-income earners a separate calculation of marginal relief is applied, using exemption thresholds (for example, children in full-time education, personal allowances or interest tax relief). The taxpayer is charged whichever is the lower of the two calculations.

For example, for a couple with one child where the wife does not work and an income of £35,000, under the 20% tax rule there would be a £3,000 exemption for the child, resulting in a taxable income of £32,000 and total tax charges of £6,400.

But under the marginal rate, taking into account an exemption limit of £22,400 and £3,000 exemption for the child, an excess of £9,600 would be applied, with a total tax bill of £2,496 – a saving for the family of £3,900.

A simple guide can be viewed here.

Last week the Income Forecasting Group revealed a predicted £125 million shortfall in income by 2019. The Fiscal Policy Panel of four economists advised earlier this year that unless action was taken to balance the books, the Island’s economy would be facing a structural deficit by 2019.

The Council of Ministers are now looking for total savings of £130 million, including £60 million from the public sector, £35 million from efficiencies and user-pays charges, and £35 million from a new, as yet unspecified, health charge. To date, however, they insist that tax rises will only be used as a last resort.

The proposal to increase the marginal rate – which aims to protect lower earners by applying exemption thresholds to tax assessments – would reverse the decision made in this year’s Budget to keep the rate at 26%.

Prior to 2014, marginal tax was set at 27%, but was reduced by 1% in the 2014 Budget in order to stimulate the economy and encourage taxpayers to spend more.

In the 2015 Budget document – published before the November elections – the then Treasury Minister, Philip Ozouf, stated that the decision to maintain the marginal rate at 26% underscored ‘commitment to middle-income earners’ and that the ‘long-term goal’ was to reduce the marginal rate to 25%.

But during States question time on Tuesday Deputy Mike Higgins said that the reduction was costing the States £8 million a year, which could not be justified and went against the advice of the Fiscal Policy Panel.

In response, Senator Maclean said the matter was already being considered for the 2016 Budget, although it was ‘more difficult’ to reverse the decision now because taxpayers were already enjoying the benefits.

Speaking later to the JEP, the minister confirmed that the change would have an impact on up to 80 per cent of households.

He said that the marginal tax rate now applied to many more taxpayers as a result of the ’20 means 20′ cuts to tax allowances – such as getting rid of interest relief on bank loans – which, together with GST, were brought in several years ago to help fill the gap left by the zero-ten corporate tax rate.

Asked whether there were any plans to do away with the marginal rate altogether, the minister replied: ‘Absolutely not.

‘All that is being considered is increasing the rate by one per cent, to 27%, as part of a number of measures.’

In terms of the economy, he added, the one per cent decrease should only have been a temporary measure in any case. ‘The idea behind it was to provide some economic stimulus – the feeling was that those beneficiaries would be more likely to spend their money in the economy.’