Chancellor Rishi Sunak’s decision to freeze all UK income tax thresholds for four years has led to a record number of people paying higher rates this financial year.
Figures from HM Revenue & Customs show that in 2022-23, 6.1mn people will pay either the 40 per cent higher rate, charged on incomes over £50,270, or the 45 per cent additional rate — the highest numbers ever. When Boris Johnson became prime minister in 2019, only 4.3mn people paid these higher rates.
The number paying the additional rate, charged on incomes over £150,000, has also increased by about 50 per cent between the 2019-20 tax year before the pandemic and 2022-23, with the total rising from 421,000 to 629,000.
Sir Steve Webb, partner at financial advisers Lane Clark & Peacock, said the changes reflected UK tax policy decisions taken by the chancellor rather than a surge in the numbers of people with very high-paying jobs.
“Paying higher rate tax used to be reserved for the very wealthiest, but this has changed very dramatically in recent years,” he said.
“The starting point for higher rate tax has not kept pace with rising incomes and the current . . . freeze on thresholds has turbocharged this trend. 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 one in five of all taxpayers will soon be in the higher rate bracket.”
Sunak imposed a freeze on the income tax personal allowance and all tax thresholds in the April 2021 Budget. At the time, he expected the policy to raise £8.1bn a year by 2025-26.
With higher UK inflation meaning that many more people will be dragged into higher tax brackets, the Office for Budget Responsibility, the country’s independent fiscal watchdog, now estimates the effective tax increase will create many more higher rate taxpayers and is a stealth tax that raises much more money.
At the time of the March Spring Statement, the OBR estimated that the freeze in thresholds would raise £18bn, allowing Sunak to give a small amount back in a promise to cut the basic rate of income tax to 19 per cent from 2024-25.
Official forecasts show that the total tax burden is set to rise to its highest level since the late 1940s, but Johnson defended his government’s taxation policy on Thursday, highlighting the planned rise in the threshold for paying National Insurance in July.
“Next month, we’ve got a tax cut worth £330 on average . . . for all payers of National Insurance contributions coming in, a very substantial tax cut in addition to what we’ve done on fuel duty and on council tax,” he said.
“Of course, we always want to try to reduce burdens, but we have to do it in a sensible and a responsible way.” The government has been raising taxes to shore up the public finances in the longer term to handle the lasting consequences of the pandemic and an ageing population.
UK governments of all political persuasions have all sought to increase the effective rate of income tax by dragging more people into higher tax bands.
HMRC figures show that in 1990 only 1.7mn people paid the 40 per cent higher rate, rising to 2.1mn when Tony Blair’s Labour government came into office in 1997.
By 2010, at the end of 13 years of Labour rule, the number was 3.3mn. In the late 1970s, when the top income tax rates on earnings could reach 83 per cent, only very small numbers of people paid these very high rates.