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Britain Faces $8 Billion Cost of Tax-Free Allowance, IFS Says

U.K. Chancellor of the Exchequer George Osborne will face a 5.3 billion-pound ($8.3 billion) bill in three years if he increases the level at which workers start paying income tax, the Institute for Fiscal Studies said.

The coalition government has a policy to increase the income tax threshold to 10,000 pounds from 7,475 pounds during the current parliament, which runs until May 2015. The cost of introducing that in the next fiscal year, which runs through March 2013, would be 8.9 billion pounds, the IFS said. The threshold is currently set to rise to 8,105 pounds next month.

“Increasing the income tax allowance takes low income people out of income tax,” wrote James Browne, author of the report published in London today. “It is the best way of focusing income tax cuts on those with lower incomes and it will strengthen work incentives, especially for low earners.”

Deputy Prime Minister Nick Clegg this week said his top priority is to raise the allowance to take low-income families out of the tax net altogether. Clegg’s Liberal Democrats, the junior partner in the Conservative-led government, are pressing Osborne to increase taxes on the wealthy to help pay for the policy in the annual budget due on March 21.

Increasing the tax-free threshold next fiscal year would leave workers earning between 10,000 pounds and 116,210 a year better off by 379 pounds a year, the IFS said.

Business Secretary Vince Cable earlier this week said the Liberal Democrats are prepared to scrap the 50 percent top rate of income tax as long as the Conservatives agree to introduce new taxes on the rich.

Cable said his party favors the introduction of a “mansion tax” on the most expensive properties so the wealthy contribute “their share.” Homes worth millions of pounds, particularly in the south of England, are going untaxed under the current system, Cable said.

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