Middle-class families face 100pc tax rate under Britain’s ‘perverse’ tax system

Britain's tax system is riddled with "perverse" incentives and punishing levies that must be reformed to make work pay, the head of a powerful parliamentary committee has warned.

Harriett Baldwin, Conservative chairman of the Treasury Select Committee (TSC), said "horrible cliff edges" in the current system had left many questioning whether an extra hour of work was worth it.

In an interview with the Telegraph, the former Treasury minister said only people who earned "over £250,000" could escape a complex web of thresholds and levies that means some middle-class families face marginal tax rates of above 100pc.

Baldwin, who describes tackling double-digit inflation as the UK's "number one economic challenge", says people need to know that the Government is on their side.

Official figures this week are expected to show inflation dropped to its lowest level in a year in April, from 10.1pc to 8.2pc.

However, the Bank of England predicts soaring prices are here for longer – which could even see Rishi Sunak miss a target to halve the headline rate by the end of the year.

"Given that backdrop, and the Chancellor's stated aim of trying to encourage more people back to work, we need to make sure there aren't these very perverse incentives that really make it very unattractive to work," she says.

Baldwin also believes high street banks are not delivering returns to savers they deserve. 

Nikhil Rathi, chief executive of the City watchdog, the Financial Conduct Authority, told the committee that the "loyalty penalty" faced by cash savers was a cultural problem that could not be fixed by naming and shaming the worst offenders.

Threadneedle Street has also become more vocal about savers getting a raw deal. It highlights that the average easy-access savings account now pays an interest rate of 1.53pc, compared with a Bank Rate of 4.5pc.

The TSC has now widened the scope of its probe into savings to include Nationwide, Santander, TSB and Virgin Money, though even she admits the TSC's influence has its limits.

"I think your readers need to realise that just as they would shop around for better-priced groceries or better prices on their energy bills, they need to shop around for better-priced savings rates."

The 63 year-old also says a Labour government will open the door to uncontrolled immigration and higher unemployment, adding that its leader Sir Keir Starmer had ordered his MPs to vote against new asylum laws designed to "stop the boats" – another key pledge by the Prime Minister this year.

The former JP Morgan investment banker, who was chosen to lead the cross-party committee last November, has had a busy six months. Baldwin has quizzed everyone from Jeremy Hunt and Andrew Bailey, to lobbyists in the crypto industry.

She even forced Alison Rose to appear before MPs after the NatWest boss claimed her diary was too full to answer questions about the bank's savings rates.

Compared with her predecessor Mel Stride, who insiders described as running more of an "economics committee" Baldwin has sharpened the TSC’s consumer teeth with the 11 members now considering whether loyal customers are being ripped off by their insurance company.

Baldwin says she believes Conservatives are guided by two main principles. 

Money should be spent wisely and taxes should be set at a level that "optimises the Laffer curve" – the theory named after the policy adviser to former US President Ronald Reagan, which said higher tax rates produce diminishing returns after a certain point because they discourage work.

"[Tax rates] shouldn't deter business investment or deter people's own labour, which I think you're seeing at the moment," she says.

However, Baldwin disagrees with some of her colleagues who argue headline tax rates must come down soon in order to have any hope of winning the next election.

"I think every Conservative aspires to having a low tax economy, but what I would say is that having spent £400bn during the pandemic I think people recognise that we can't pass that on as a burden to our children. We've got to make responsible budgets."

Her focus is on eliminating quirks in the system either by design or neglect that mean some families face soaring marginal tax rates.

Baldwin wants Hunt to fix some of the "bizarre cliff edges" faced by millions of families because of the way tax-free perks and welfare such as the personal allowance of child benefit is withdrawn as earnings rise.

"It's not just a debate about the level of taxes, everyone would love to see lower taxes. It is also about some of the messages that the tax and benefit system is sending people about what's the marginal value of that extra hour of work, and there are really lots of very perverse messages that you're getting throughout the tax and benefit system," she says.

She says the most egregious example involves parents who earn between £100,000 and £130,000 who are substantially worse off after the Chancellor expanded free childcare to one and two year-olds in the Budget. 

One worker on a six-figure salary is not eligible for the extra support. However, a family where both earn £99,999 can get 30 hours of free childcare.

Meanwhile, top earners also have their personal tax-free allowance tapered at a rate of £1 for every £2 earned between £100,000 and £125,140. 

This means a parent in this earnings bracket with two children under three whose child care provider charges England’s average hourly rate for 40 hours per week will be worse off than one earning £99,000 after these reforms.

Asked if she believes it is necessary to redesign the current system to ensure work pays, Baldwin says: "Absolutely, who doesn't think that? And for every extra pay rise you get, you should be paid more, and for every extra hour that you work, you should receive more. 

I would say the evidence we've received in our tax reliefs and our and our inquiry into cliff edges would illustrate that that's not the case throughout our tax system."

The subject turns to the next election. With a 25,000 majority in West Worcestershire, Baldwin's seat is considered safe – even in today's political climate. 

She says she takes nothing for granted. "All that stuff with three different prime ministers last year, there's no question that annoyed a lot of my constituents," she says.

A thinly-veiled jibe at Liz Truss's short premiership, which she says left markets with no "confidence in the budgeting process" is followed by praise for the former prime minister's successor. 

Baldwin, who backed Penny Mordaunt's bid for the top job last summer, is full of praise for Sunak. 

"Colleagues have been very pleased with the sort of level of detail with which he's gripped things," she says, suggesting the only way that the Tories can fend off Labour for a fifth time is by settling differences within the party.

"We need to go into next year's election as a team. So we need to roll in behind our prime minister."

Baldwin, who read French and Russian at university, says the stakes are high. "I have only one political ambition in life, and that is to keep the socialists out of power," she says. 

"I went to the Soviet Union when it was still the Soviet Union. And I wasn't interested in politics at that stage in my life, but I said, ‘Whatever this political system is, I'm the opposite of that’. 

“So we've got to make the case for a centre-right party that backs business, that ensures that people have the opportunity to have good education, good public services and good jobs. 

“That's what I stand for. And that's what we'll go into next year's election talking about."