- Huge tax increase, equivalent to an increase in the main VAT rate from 20 to 26 percent
The number of people paying higher income tax will double to almost nine million under the government’s £52bn tax crackdown, an analysis suggests.
The Institute for Fiscal Studies (IFS) has found that 8.9 million people will be subject to a higher tax rate by the 2027/28 financial year – equivalent to a sixth of the adult population.
It said the “huge tax rise” would be equivalent to a 6p per pound increase in the basic and higher income tax rates, or an increase in the main rate of VAT from 20 per cent to 26 per cent.
The number affected has risen from 4.4 million when the freeze was introduced in 2021 and is almost three times higher than the 3.2 million who paid higher taxes at the end of the last Labor government in 2010.
In previous generations, the higher income tax rate applied to a much smaller portion of the population, affecting just 1.7 million in 1990/91.
The higher income tax rate applied to fewer than 2 million people in 1990/91, but the Institute of Fiscal Studies predicts that 8.9 million people will fall into this category by 2027/28
The analysis is likely to further outrage Tory MPs who are calling for tax cuts ahead of next year’s general election.
But Chancellor Jeremy Hunt has signaled there will be little to smile about when he makes his autumn statement next month.
Instead, he will have to make “difficult decisions” given the deterioration in Britain’s public finances, he warned last week.
In 2021, income tax thresholds were frozen for four years, and last autumn Mr Hunt extended the freeze for a further two years.
This means more and more middle-income households will be caught up in the 40 per cent higher tax rate for incomes above £50,270, even if their salaries only rise in line with the cost of living.
The total figure of £8.9 million calculated by the IFS also includes those paying the 45 per cent top rate on incomes of more than £125,140.
The threshold for paying any income tax has also been frozen at £12,571.
Overall, the IFS believes the freeze amounts to “a whopping £52bn tax rise” which will “further dampen already weak take-home pay growth”. This means that there are a total of 6.5 million more income taxpayers and 4.5 million more higher and additional taxpayers than in 2020.
If the threshold for paying higher taxes had been allowed to rise with inflation rather than being frozen, it would be £63,975 in 2027/28.
The freeze means 80 percent more people will pay a higher tax rate than would have been the case if it had been linked to inflation, the IFS said.
And Mr Hunt has little scope to change that in the autumn statement as debt interest payments soar and the outlook for economic growth worsens, the analysis says.
IFS director Paul Johnson said: “The price of our high levels of debt, failure to stimulate growth and high borrowing costs is likely to be a long period of high taxes and tight spending.” The scale of the stealth tax puts other tax rise measures in the spotlight recent history, the IFS said.
For example, the 2010 decision to increase the main VAT rate from 17.5 percent to 20 percent will be worth £21 billion in 2027/28 – less than half the value of the stealth tax.
The overall impact of the freeze has increased due to high inflation as well as the two-year policy extension and extension to social security contributions.
Chancellor Jeremy Hunt has signaled he will have to make “difficult decisions” in his autumn statement next month
At the time of its introduction at the start of the 2021/22 financial year, it was expected to increase government revenue by £8.2 billion a year by 2025/26.
At the time the Budget was published in March this year, it was estimated that the freezes would raise £37 billion annually by 2027/28. However, the IFS said the estimate, based on figures from the Office for Budget Responsibility (OBR), assumes “very low inflation rates” in the coming years.
Using recent Bank of England inflation forecasts, the figure is estimated at £52 billion, 40 per cent higher than the OBR expected in March.
The IFS report also speculates that while the current plan calls for the freeze to continue until 2027/28, “something different could end up happening.”
But the report also calculates that if the Chancellor gives in to pressure to lift the freeze a year early, it would reduce the Treasury’s £52bn treasury by £5bn, according to the IFS.
Mr Hunt has expressed a desire to finally reduce the tax burden, which is on track to reach its highest level since the Second World War, but stressed: “There is no shortcut to lower taxes.”