Stealth tax raid forces two million people into higher bands

·4-min read
Income tax treasury - Yui Mok/PA
Income tax treasury - Yui Mok/PA

Nearly two million workers have now been dragged into the higher rate income tax bracket since the Conservatives won the election.

The number of workers paying 40pc or 45pc tax has soared from 4.25 million to more than 6.1 million today, HM Revenue & Customs figures show.

It comes after the Treasury enforced a five-year freeze on tax thresholds before inflation sky-rocketed.

The threshold freeze is now forecast to create a total of more than three million extra higher rate taxpayers before 2026, according to analysis from consultancy LCP.

It means a total of seven million workers will be paying at least the 40pc rate tax by the time of the next election – more than one in five of all taxpayers.

The Treasury has raked in billions of pounds in extra tax during the worst cost-of-living crisis in generations thanks to the “fiscal drag” phenomenon, which is accelerated during times of high inflation and sees workers pulled into higher income tax brackets as their wages increase in line with price growth..

The Prime Minister and Chancellor have faced widespread criticism, including from their own MPs, for increasing the tax burden and inflicting the new 1.25pc National Insurance levy during the worst cost-of-living crisis in four decades.

The Treasury’s income tax take has jumped by nearly a third in three years, rising to £251bn from £189bn by 2022-23.

Since the Conservatives returned to power in 2010, the number of higher rate taxpayers has nearly doubled from 3.2 million to 6.1 million.

The higher rate tax threshold was £43,875 in 2010, and has since been raised to £50,270.

It comes as reports suggest No 10 has proposed a VAT cut to tackle inflation and ease the cost of living crisis.

Steve Barclay, the Prime Minister’s chief of staff, suggested reducing the 20 per cent headline rate of the tax, The Times reports.

Robert Colvile, of think-tank the Centre for Policy Studies, said the record high tax burden would cost millions of households during a time of “hideous” cost of living pressures.

He said: “Rishi Sunak has praised Nigel Lawson as a great Tory Chancellor. But in Lawson's day, only 5pc of taxpayers were caught by the higher rate. Today, the proportion is almost four times higher. That can't be right.”

Tax thresholds were frozen across the board, despite Boris Johnson claiming ahead of the December 2019 election that his ambition was to increase the higher rate tax band to £80,000.

The 40pc higher rate of income tax is paid on annual income between £50,271 and £150,000. Income above that is taxed at 45.

The colossal tax take revealed in the figures published yesterday exceeds the Government’s expectations, raking in nearly £20bn more than predicted during the spring Budget last year.

Sir Steve Webb, partner at LCP and former pensions minister, said: “People who would not think of themselves as being particularly rich can now easily face an income tax rate of 40pc and around one in five of all taxpayers will soon be in the higher rate bracket.”

The freeze on income tax thresholds, dubbed a stealth tax raid by critics, will collectively cost families in England, Wales and Northern Ireland almost £11bn by 2026, research by the House of Commons Library, commissioned by the Liberal Democrats, previously found.

The high level of taxation has been justified by the Government as being needed to repair the economy and the NHS after the Covid-19 pandemic.

However, Sarah Coles of investment service Hargreaves Lansdown added: “It’s far more than any of us can afford at a time of runaway prices, and it’s going to get worse.”

Tom Waters, of the Institute for Fiscal Studies think tank, said that making long-term changes to income tax thresholds was “foolish and dangerous”, as circumstances could change abruptly, as they recently have.

He said: “The Government announced the freeze a considerable time before the current bout of inflation was in sight. This is a dangerous way to make policy because they won’t accept a u-turn and have to try to make changes elsewhere.”

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting