One in seven UK adults will pay 40 per cent income tax by 2027-28 due to 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 when it comes to an end, the freeze on tax thresholds and allowances would represent the biggest single taxation measures since 1979, when Chancellor Geoffrey Howe nearly doubled the rate of VAT.
Analysis published by the think tank showed the share of UK adults paying the 40p rate fell from 3.5% in 1991-92 to 11% in 2022-23. During most of this period, the threshold increased according to inflation but average wages rose faster, bringing more people into the upper bracket.
Now freezing the threshold at a time of sharply rising prices and rising wages means the number of higher rate taxpayers is set to grow even faster, encompassing 14% of UK adults – or 7.8million people in the UK. 2027-28.
“Freezing the thresholds during a period of high inflation is going to have a much bigger impact,” said Isaac Delestre, research economist at IFS. He added that the freeze would ultimately play a bigger role in the fiscal tightening put in place by Prime Minister Rishi Sunak as Chancellor and reinforced by Jeremy Hunt, the current Chancellor, than the more publicized tax hike. on companies.
The think tank said policy choices made by successive governments meant that a tax bracket originally reserved for the wealthiest would now affect many people who were not generally considered to be very well paid.
By 2027-28, a quarter of teachers, a fifth of electricians and more than one in eight nurses will pay the 40p tariff, along with almost half of architects and lawyers, according to his calculations.
Disposable household 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, 3.1 million of the top earners will pay marginal tax rates of 45 per cent, for those earning over £125,140, or 60 per cent, the IFS noted – almost as much as those who paid higher tax rates. in the early 1990s.
The marginal rate of 60 per cent is the result of a change in 2010 which reduces the tax-free personal allowance for people with incomes over £100,000 by 50 pence for every extra pound they earn.
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