Stealth rises to drag four times as many people into top rate of tax

A stealth tax timebomb will leave one in five taxpayers paying 40 percent tax in just four years, shock analysis found. Prime Minister Rishi Sunak was warned he must take action now or preside over a “tax on aspiration” that will disincentivise people from working hard.

Nearly quadruple the number of workers will soon be on higher rate tax than there were in the 1990s, including teachers, nurses and electricians, according to the Institute for Fiscal Studies (IFS).

The six-year freeze to income tax allowances and thresholds, which started in April last year, is expected to become the single biggest tax-raising measure since the 1970s.

Former business secretary Jacob Rees-Mogg said: “It’s a real problem that fiscal drag is any government’s favourite stealth tax.

“When inflation is high, people really begin to see a decline in living standards. This is going to become more of a political problem.

“It’s a stealth tax that has to go. But we cannot have unfunded tax cuts. There has to be spending restraint. This has turned from a tax on high earners to one on middle incomes.”

Senior Tory David Jones said: “People of moderate means are entering higher tax brackets because of frozen thresholds.

“This is the phenomenon of fiscal drag – a technique of Labour Chancellors, which should never be adopted by Conservatives. It’s time for Jeremy Hunt to prove he really is a low tax Chancellor and address this unfairness.”

Sir John Redwood said: “People are being asked to pay far too much tax. We want a policy based on growth and prosperity. We need to lift living standards and raise take home pay.

“You are dragging people into a high tax paying net when they don’t have the income to justify it because inflation has eroded it all.It is a tax on aspiration. I want lower rates now because then we will get the deficit down more quickly by growing the economy.”

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A former Cabinet Minister said: “The 40 percent rate was only meant to be paid by those earning the most – those earning over £85,000 today – but Labour decided to squeeze middle earners instead.

“As Conservatives, it is time to cut taxes for hardworking families and stop people like middle ranking policemen, experienced teachers and many junior doctors paying 40 percent income tax.”

The IFS analysis predicted that 7.8 million people will be paying income tax at 40 percent or above by 2027.

It works out to around 20 percent of taxpayers and one in seven of the adult population – a “seismic shift” compared to higher rate levels in the early 1990s.

In 1991, 1.6 million adults, 3.5 percent paid the higher rate, but by 2022 the figure had gone up to 6.1 million, or 11 percent.

The IFS predicted more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers are set to be higher-rate taxpayers by 2027.

“Among police officers, architects and surveyors, and legal professionals, we also see significant increases in the share paying higher-rate tax over time, with almost half of the latter two groups expected to be paying higher-rate tax in 2027-28.”

The standard personal allowance is £12,570, which is the amount of income someone does not have to pay tax on.

For the 40 percent rate to impact the same fraction of people as it did in 1991, the higher rate threshold would need to be nearly £100,000 in 2027–28 – nearly double the current trigger of £50,271.

Taxpayers’ Alliance analysis found the tax burden under the Conservatives is not far off where it would have been if Jeremy Corbyn had won in 2019.

It warned the frozen tax thresholds are “working against” the government’s aim of getting more people back into work.

Mark Littlewood, Institute of Economic Affairs director general, warned that the impact of dragging more people into the higher rate will be “serious” as it will deter work and aspiration.

He said: “The higher rate of tax was initially envisioned to capture an enhanced revenue stream from super-high earners. Managing, at some point, to get your salary to above £50,000 surely can’t be said to be in that category.

“However, if we are determined to continue to see huge increases in government spending – which we have done since the Conservatives came to power in 2010 – then these sort of stealth taxes brought about by fiscal drag are an almost inevitable consequence.

“The incentive effects could be serious – we are deterring work and aspiration at key pinch points on the income spectrum where you might think we need it most. Expect growth to remain low, spending to remain high and taxes to get worse.

“This should be an avoidable doom loop but it is not one that any mainstream party seems willing to address.”

A Treasury spokesman said: “After borrowing hundreds of billions to support the economy during the pandemic and Putin’s energy shock, we had to take some difficult decisions to repair the public finances and get debt falling. It is vital we stick to this plan to halve inflation this year and get our economy growing again.

“To support working families, we have doubled the tax-free Personal Allowance, taking 3 million of the lowest earners out of paying income tax altogether.”

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