One in seven UK adults will be paying income tax at 40 per cent by 2027-28 because of a six-year freeze on the threshold at which the higher rate kicks in, according to an influential think-tank.
The Institute for Fiscal Studies said on Tuesday that by its end, the freeze on tax thresholds and allowances would represent the largest single-tax-raising measures since 1979, when then chancellor Geoffrey Howe almost doubled the rate of VAT.
Analysis published by the think-tank showed the share of UK adults paying the 40p rate rose from 3.5 per cent in 1991-92 to 11 per cent in 2022-23. For much of that time, the threshold increased in line with inflation but average wages rose faster, bringing more people into the higher rate band.
Now, freezing the threshold at a time of strong price rises and wage growth means the number of higher rate taxpayers is set to increase even faster, encompassing 14 per cent of UK adults — or 7.8mn people by 2027-28.
“Freezing thresholds during a period of high inflation is going to have a much bigger impact,” said Isaac Delestre, research economist at the IFS. He added that the freeze would ultimately play a bigger part in the fiscal tightening set in train by Prime Minister Rishi Sunak as chancellor and reinforced by Jeremy Hunt, the current chancellor, than the higher-profile increase in corporation tax.
The think-tank said policy choices made by successive governments meant that a tax band originally reserved only for the very richest would now affect many people who were not typically thought of as highly paid.
By 2027-28, one-quarter of teachers, one-fifth of electricians and more than one in eight nurses will be paying the 40p rate, along with almost half of architects and lawyers, according to its calculations.
Households’ disposable income will be 1.4 per cent lower by 2027-28 than it would have been if the tax-free personal allowance of £12,570 and the higher-rate threshold of £50,270 had instead been increased in line with inflation, the IFS said.
By 2027-28, 3.1mn of the highest earners will be paying marginal tax rates of either 45 per cent, for those earning above £125,140, or 60 per cent, the IFS noted — almost as many as were paying higher rate tax at all at the start of the 1990s.
The 60 per cent marginal rate is the result of a change in 2010 that reduces the tax-free personal allowance of people with income above £100,000 by 50p for each additional £1 they earn.
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