A million more people will pay top-rate tax: £50bn grab for Treasury will drag 1.3m workers into higher band, experts warn
Around 1.3 million more working age adults are to be dragged into paying the higher rate of income tax.
Almost six million will be paying 40 per cent tax on at least some of their earnings by the end of this Parliament.
That’s more than double the number who paid the higher rate back in 2010. The move could raise almost £50billion more in revenue for the Treasury.
Yesterday, two major audits concluded that millions of middle earners will be left worse off thanks to Rishi Sunak‘s decision to put up taxes amid a cost of living squeeze.
A major report by the Institute for Fiscal Studies (IFS) said that the combination of inflation and higher taxes would outweigh any wage increases for those on middle incomes. It warned that middle earners would be around £180 worse off next year compared to their present income.
A separate study by the Resolution Foundation think tank warned that, thanks to the Budget, tax bills for the average household will be £3,000 higher by the end of the Parliament than when Boris Johnson became PM.
The Chancellor delivered his autumn budget statement to the House of Commons on Wednesday.
The conclusions came a day after the Chancellor unveiled his Budget alongside official forecasts which showed the overall tax burden rising to its highest level since the 1950s.
At the same time, the Office for Budget Responsibility warned that the cost of living could rise at its fastest rate for 30 years. It predicted that inflation could jump from 3.1 per cent now to around 4 per cent in 2022, a development that could see interest rates – and mortgages – soar.
Yesterday, Paul Johnson, director of the IFS, said: ‘Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards.
‘The worry for the government is that, for all the Chancellor’s upbeat delivery, the voters may not get much feel-good factor.
‘A middle earner is likely to be worse off next year than this as high rates of inflation and tax rises more than negate small average wage increases.’
According to the IFS, 5.9 million people will have to fork out the higher rate by the end of this Parliament – up from just 2.6 million when the Tories came to power in the coalition in 2010.
The 40 per cent higher rate was originally introduced to capture the very top earners in the country. Thirty years ago, just 1.7 million people fell into the 40 per cent bracket.
But that number is set to soar after the Chancellor vowed to freeze the income tax thresholds until 2026, rather than increasing them in line with inflation.
Anyone whose earnings rise above £50,271 over the next five years will have to pay 40 per cent tax on anything above that amount. On anything above £150,000, they will have to pay the additional rate of 45 per cent.
The move, dubbed a ‘stealth tax raid’ by experts, means that 1.3 million more people over the next three years will be dragged into paying the higher rate of income tax as workers see their wages rise but the threshold does not. Currently around 8.5 per cent of the working population, or 4.6 million people, pay the higher rate.
A worker on just £25,000 will end up paying £1,101 more in additional income tax between the 2022-23 financial year and 2026-27, as they fall into the frozen thresholds in a phenomenon known as fiscal drag.
Paul Johnson (pictured), director of the IFS, said: ‘Over the next several years a combination of tax increases and high inflation will mean very slow growth in living standards’
By freezing the income tax thresholds until 2026 – including the lower levels, meaning people on more modest salaries will also be dragged into higher tax brackets – Mr Sunak is forecast to raise a total of £47 billion. The money will go towards his generous spending plans, funnelling cash to Government departments such as education and justice which have been starved of funding for over a decade.
Harry Fone, of campaign group the TaxPayers’ Alliance, said: ‘Taxpayers will be rightly furious that they find themselves in the higher rate tax bracket. The Conservatives claim to be the party of lower taxes but time and time again they’ve hammered hard-working people.’
The IFS’s analysis yesterday said that over the next 12 months, middle earners – those on around the median salary of £25,000 – will lose out. Once taxes are taken off, their pay will fall by about 1 per cent, or £180 per year, after inflation.
Wages have remained stagnant since the 2008 financial crisis, and the IFS said this will probably continue for a few more years.
It means Britons face an ‘unprecedented’ 20 years of wages staying at the same level.
The IFS said the average worker earns £13,000 less today than they would have done if earnings had kept pace with pre-crisis predictions made in 2008.
If the forecasts had come to pass, someone earning £30,800 today would be taking home £43,700 instead.
The figures contained in the IFS report did not match the upbeat tone of Mr Sunak’s Budget speech on Wednesday, when the Chancellor claimed he was ‘ushering in a new age of optimism’.
Mr Johnson said voters ‘may not get much feelgood factor’ with high inflation, rising taxes and poor growth.
He said these factors will see living standards ‘barely rising and, for many, falling over the next year’.
A report by the Resolution Foundation think tank claimed that tax bills for households will be £3,000 higher since Boris Johnson entered Number 10
The IFS’s analysis yesterday said that over the next 12 months, middle earners – those on around the median salary of £25,000 – will lose out. Once taxes are taken off, their pay will fall by about 1 per cent, or £180 per year, after inflation
With the possibility of inflation hitting the highest level in three decades, he warned that ‘millions will be worse off in the short term’.
Mr Johnson said welfare payments will rise by around 3 per cent, while inflation could be 5 per cent.
‘That will be a real – if temporary – hit of hundreds of pounds a year for many benefit recipients,’ the director added.
‘We are not at 1970s levels of inflation but we are now experiencing enough inflation that real pain will be felt as low-income households – most of whom have little in the way of financial assets – wait more than a year for their incomes to catch up.
‘For some in work that may never happen.’
Meanwhile a separate report by the Resolution Foundation think tank claimed that tax bills for households will be £3,000 higher since Boris Johnson entered Number 10.
It said wages are also unlikely to rise in real terms this year due to high inflation and will only increase by around 2.4 per cent between the financial crisis in 2008 and 2024, compared with a one-third rise recorded in the 16 years prior to 2008.
James Smith, the Foundation’s research director, said that by 2026/27 the tax take will be at the highest level since 1950.
‘We’re becoming a bigger state and more higher tax state,’ he said. The total increases in taxes since Boris Johnson has become Prime Minister is equivalent to around £3,000 for each household in the UK, so this is a really chunky change, although most of that falls on people on higher and middle incomes.’
‘Slow growth is really casting a shadow over what’s happening in terms of the overall health and outlook and household finances are still in pretty bad shape and a huge challenge.’
Downing Street said the Foundation’s per-household calculation was unfair as it included rises to corporation tax and others not paid by individuals.