One in five to be charged higher income tax rate by 2025

·2-min read
Taxation income tax budget IFS
Taxation income tax budget IFS

An extra 1.6m people will be dragged into the higher rate of income tax by 2025 unless Kwasi Kwarteng scraps Rishi Sunak's freeze on thresholds, economists have warned.

Rampant inflation combined with the decision to hold income tax bands for four years means 7.7m people will end up paying the 40pc rate in 2025, according to the Institute for Fiscal Studies (IFS), as their living standards take a battering from higher prices.

It means one in every five taxpayers will be in the higher bracket, and amounts to 14pc of all adults.

The higher rate was initially expected only to hit those with very large incomes. Thirty years ago, only 1.7m people, or 3.8pc of all adults, incurred the charge.

But now it is becoming commonplace, and amounts to a rich seam for the Treasury which will rake in more revenue as a result.

Xiaowei Xu, at the IFS, said: “Because of the high rate of inflation that we are seeing, this has ended up being a much bigger policy than was initially forecast,” she said.

“It is poised to raise nearly four times the £8bn it was initially expected to raise.”

If the thresholds increased with inflation, instead of sticking at £50,270 for the higher rate and £12,570 for the tax-free allowance, then she estimated the share of adults paying the higher rate would have fallen to 9pc, as incomes are not keeping up with prices, meaning the bracket would pull ahead of wages.

Mr Kwarteng, the Chancellor, is expected to undo some of his predecessor Mr Sunak's plans, cutting the NI raid on workers and their employers, which will boost take-home pay.

However, despite the tax cuts and very heavy spending to hold down energy bills, the average person will still feel worse off this year than last year thanks to galloping inflation which is eroding living standards.

The median worker on £29,000 will be just over £500 worse off, equating to a 2.8pc fall in their real earnings, the IFS estimates.

Someone on £44,000 will be down more than £1,000, or 3.9pc.

Only a full-time worker on the minimum wage, earning £16,200, will find themselves keeping up with prices, eking out a 0.1pc rise in take-home pay this year.

Boris Johnson’s government effectively overall implemented “a large tax rise”, said Ms Xu.

Some of this will be softened by Mr Kwarteng’s expected tax cuts, but overall Britons face net tax rises over the past 12 months, amounting to a roughly £500 hit for the average household, rising to close to £2,000 for those in the top 10pc by income.