Freeze in allowances means higher income tax rates no longer ‘reserved for very wealthiest’
Nearly two million more people are paying higher rate income tax because Rishi Sunak has scrapped normal increases in allowances, new figures reveal.
The numbers paying the higher 40 per cent rate or the additional 45 per cent rate has soared since Boris Johnson came to power in 2019 because of the “stealth tax”, they show.
A four-year freeze in the thresholds – which the chancellor is under pressure to rethink, because of soaring inflation – will create more than 3m higher rate taxpayers by the next election, the consultancy LCP is estimating.
“Paying higher rate tax used to be reserved for the very wealthiest, but this has changed very dramatically in recent years,” said Steve Webb, a partner at the firm and a former pensions minister.
“People who would not think of themselves as being particularly rich can now easily face an income tax rate of 40 per cent and around 1 in 5 of all taxpayers will soon be in the higher rate bracket.”
The total number of taxpayers has risen by 2.5 million since 2019, from 31.5 million to 34 million, Sir Steve added.
The freeze in allowances had been expected to bring in £8bn for Mr Sunak by dragging millions more workers into paying higher tax.
But dramatic rises in inflation – now tipped to top 11 per cent later this year – mean it is now expected to hand the Treasury £21bn over the period.
Paul Johnson, the director of the Institute for Fiscal Studies said, in March: “With much higher inflation forecasts, it looks like being a massive £21bn tax rise – two-and-a-half times bigger than intended.”
Mr Sunak has defended the allowance freeze – which comes at the same as his national insurance increase – as “a fair way to help solve the problems that we need to”.
Announced last year, the income tax personal allowance – the level above which people pay income tax – will be held at £12,570 from 2022 until 2026.
And the threshold for higher rate income tax of 40 per cent will be frozen at £50,270 over the same period.
The chancellor also came under fire at an event hosted by the British Chambers of Commerce, which gave the government until the autumn to “rethink and get their house in order”
Shevaun Haviland, the organisation’s director general, said businesses face a “perfect storm” of spiralling costs and demanded an “urgent review” of the list of shortage jobs with looser post-Brexit immigration curbs.
“The Spring Statement was a missed opportunity. We saw some support for business, but the lack of a clear strategic direction meant it did not give clarity or confidence,” she said.
“This has to change; we are on limited time. The government has until the autumn budget to reset, rethink and get their house in order.”