By 2027–28 the number of people paying income tax at 40%
or above will reach 7.8 million –
that’s one in five taxpayers and one in seven of the adult
population – a near-quadrupling of the share of adults
paying higher rates since the early 1990s.
This represents a seismic shift. New analysis by researchers at
IFS shows that while in the 1990s essentially no nurses and just
one in sixteen teachers paid higher-rate tax, by 2027–28
more than one in eight nurses and one in four teachers
are set to be higher-rate taxpayers.
The six-year freeze to income tax allowances and thresholds which
started in April last year is now set to become the
single biggest tax-raising measure since Geoffrey Howe doubled
VAT in 1979. It will play a major role in expanding the
reach of higher rates over the coming years. The freeze will also
compound challenges facing the many workers whose earnings are
not keeping up with inflation – indeed, a third of the
expected record fall in household incomes this year is likely to
be a result of this tax rise.
Other findings include:
-
In 1991–92 3.5% of UK adults (1.6
million) paid the 40% higher rate of income tax. By
2022–23 11% (6.1 million) were paying higher rates, with that
figure set to reach 14% (7.8 million) by
2027–28.
- Of that 14%, 3.1% of adults (1.7 million) will face
marginal tax rates of either 45% or 60%. (The 60% rate
kicks in at £100,000 and the 45% rate at £125,140.) That’s almost
as large a share as paid the 40% higher rate at the start of the
1990s.
- That means that for the 40% 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 – almost
double its actual level of £50,270.
In the space of 40 years, higher rates of income tax will have
gone from being a feature of the system reserved for those with
the very highest incomes, to one that impacts a far more
substantial proportion of the population. The 60% and 45% rates
now play much the same role as that which the 40% rate used to
play.
Isaac Delestre, Research Economist at IFS, said:
‘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. Alongside the fact that 1.7
million people will be paying marginal rates of 60% and 45% in
the next few years, this represents a fundamental and profound
change to the nature and structure of our income tax system. The
freeze to thresholds is supercharging that process, pulling an
additional 2.5 million more people into paying rates of 40% or
more by 2027–28. Whether or not the scope of these higher rates
should be expanded is a political choice as much as an economic
one, but achieving it with a freeze leaves the income tax system
hostage to the vagaries of inflation – the higher inflation turns
out to be, the bigger impact the freeze will have.’
