Will MPs finally tackle the terrible tax trap?

Later today Rachel Reeves will deliver her Spring Statement to the Commons. She has not, it must be said, helmed the happiest run of these set-piece occasions. Her first Budget involved roughly £40 billion in tax rises. Another was memorably marred by an early leak of market-sensitive material. 

Yet it is not only in the grand moments that this government has struggled. Growth has been anaemic, the tax burden is at a post-war high, and there remains a sizeable contingent on the Labour benches for whom spending restraint is an unknown, perhaps faintly distasteful, concept. Even Tony Blair agrees as much.

Still, amid the familiar gloom, one piece of wage news this week may – just possibly – carry the seeds of long-term reform, albeit not for the reason its authors intended.

MPs’ salaries are now set to rise to around £110,000 by the end of this Parliament, ostensibly in recognition of growing demands on their time and swelling casework (though cynics might observe that much of this burden is borne by their long-suffering staff). The immediate uplift amounts to roughly 5 per cent – an inflation-busting figure beside the 3.3 per cent reportedly pencilled in for nurses and the 3.5 per cent for parliamentary staff.

There’s an argument to pay MPs more, to attract better talent and pull people away from their already high-paid jobs. But this particular increase has an intriguing side effect: it nudges many MPs squarely into one of Britain’s most perverse fiscal contraptions.

By placing it above £100,000 it might just push MPs into fixing the horrendous, work-discincentivising tax trap, whereby earners on between £100,000 and £125,140 face an effective 60 per cent marginal tax rate. 

For every £2 earned over £100,000, £1 of the personal allowance is lost, creating the hidden tax band on top of the 40 per cent higher rate.

Plus earners in this bracket see the end of free child support. Workers end up worse off as they earn more.

With an MP’s salary north of £100,000, many parliamentarians will now find themselves staring directly into this fiscal abyss for the first time. It would be the latest in Westminster waking up to issues that they personally feel.

Take student loans. While Kemi Badenoch has recently led the way on the issue in opposition – pledging to cut interest rates on student loans – there are young Labour MPs who have been feeling the pain of repayments personally, and it might lead to yet another U-turn from Sir Keir Starmer and his Chancellor.

Labour MP for Uxbridge and South Ruislip Danny Beales last night tweeted:

“It’s time to talk about student loans and the need to deliver change. 

“The Plan 2 system has effectively become a graduate tax – with many feeling the system is unfair and regressive.

“Last week, I outlined the need for change in my letter to the Chancellor.”

Beales’ letter says he “does not regret taking out the loan” but many other new, young MPs have spoken about their £90,000 debt under the Plan 2 system, and I can’t now imagine wanting to accidentally fall into a higher marginal tax rate. With this pay rise, MPs who still have student debt will end up paying a marginal tax rate of 71 per cent over £100,000 and 77 per cent for postgrads.

Maybe this is the state we have got to, we need our parliamentarians to have directly felt an issue to want to fix it. It concentrates the mind.

But perhaps the best solution is one floated by the Taxpayers’ Alliance (TPA), acknowledged by shadow business secretary Andrew Griffith, and even hinted at by Business Secretary Peter Kyle: link MPs’ pay to GDP per capita, which measures the average economic output per person.

Kyle said to link their pay to overall GDP to encourage departments to do more to boost economic growth, but doing so with GDP per capita is a better prompt for this – tying it to the prosperity of individual Brits.

And Griffith had suggested doing so with senior civil servants to “bring a sharper focus next time Whitehall is introducing more red tape on business”.

If it were to apply to MPs it would, according to research from the TPA, lead to an actual pay cut. If MPs’ pay had gone up by GDP per capita since 2010, their pay would be £81,945.

As their campaigns director and our ConHome columnist Elliot Keck writes: “That’s brutal, but it’s just a reflection of the decades of terrible policy choices made by Parliament.”

Maybe then we would see more than just a reconsideration of the tax trap, maybe we would see pro-growth policies finally enacted.

Nothing clarifies the case for economic reform quite like paying the bill yourself.