Sunak pulls off biggest tax raid in 44 years as one in five pay higher rate
Six-year freeze on income tax thresholds is Treasury’s single biggest revenue raiser
One in five taxpayers will be paying higher-rate income tax by 2027 as Rishi Sunak's stealth raid forces millions to hand more of their earnings to the Government.
The Institute for Fiscal Studies (IFS) said the Prime Minister and Chancellor's six-year freeze on income tax thresholds is the Treasury's single biggest revenue raiser since Geoffrey Howe increased VAT from 8pc to 15pc in 1979.
It will push the number of people paying a tax rate of 40pc or more on their earnings to 7.8 million by 2027-28, according to official estimates. That represents a quadrupling in the share of adults paying the higher rate since the early 1990s.
The change is because of so-called “fiscal drag”, which pushes more people into higher income tax brackets as pay levels rise but tax brackets do not.
Tax allowances traditionally go up in line with inflation but were initially frozen by Mr Sunak from 2022 to 2026. Mr Hunt extended the freeze for two more years when he became Chancellor.
The IFS warned that the freeze will “disincentive work” and drag hundreds of thousands of teachers, nurses and electricians into the higher rate tax band for the first time, adding to the cost of living challenge facing many workers.
Households face a record fall in incomes this year and the IFS said a third of the slump was because of the stealth raid.
The IFS said “essentially no nurses” and only about 5pc of teachers and electricians paid more than the basic rate of income tax in the 1990s. However, one in eight nurses and a quarter of all teachers will be subject to higher rate income tax by 2027.
The situation has been exacerbated by decades of thresholds rising slower than earnings, the IFS said, as well as former chancellor George Osborne's decision to cut higher rate thresholds in cash terms before partially reversing them in the mid-2010s.
“More adults than ever are paying higher-rate tax,“ the think-tank said, adding that the levies once “reserved only for the very highest paid” were now pushing traditionally working and middle class jobs into higher tax traps under Mr Sunak.
The threshold for the highest-rate tax is currently frozen at £50,270. The think-tank calculated that for the 40p rate to hit the same fraction of people as it did in 1991, the higher-rate threshold will need to be “nearly £100,000” by 2027.
Research by the IFS also showed 1.7 million workers were on course to start paying a marginal rate of either 60pc or 45pc by 2027. This is just below the share of adults who paid the 40pc higher rate at the start of the 1990s.
Isaac Delestre, research economist at the IFS, highlighted the “unwelcome proliferation” of “spikes” in Britain's tax system that means people who earn between £100,000 and £125,140 face a marginal tax rate of 60pc on every £1 of extra income earned.
This is because the tax free personal allowance begins to be tapered away at this level, which has been frozen since its introduction in 2010.
Mr Delestre said the so-called “60pc tax trap” was having a “much bigger effect on people's incentives to work” as workers stash more into their pensions or work fewer hours to avoid paying the higher rate.
The IFS said stealth raids were “not a sensible way to make tax policy”. Mr Delestre added: “For income tax, the story of the last 30 years has been one of higher-rate tax going from being something reserved for only the very richest, to something that a much larger proportion of adults can expect to encounter.”
The six-year stealth raid is set to be larger as a share of national income than Mr Hunt's decision to raise corporation tax from 19pc to 25pc. It is also a bigger tax grab than Gordon Brown's decision to abolish the 10p income tax rate in 2007.
Mr Delestre said: “Alongside the fact that 1.7m people will be paying marginal rates of 60pc and 45pc in the next few years, this represents a fundamental and profound change to the nature and structure of our income tax system.”
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