About 7.8 million people in Britain will be eligible to pay higher-rate income tax by 2027, according to the Institute for Fiscal Studies.
Higher rates of income tax have gone from being reserved only for the richest to something that a far more substantial proportion of the population, including some teachers, nurses and electricians, can expect to encounter, IFS said.
One in five taxpayers are projected to be paying income tax at 40 per cent or above by 2027-28.
The IFS said this equates to about 20 per cent of taxpayers and one in seven, or 14 per cent, of the adult population — representing a “seismic shift” that will nearly quadruple the share of adults paying higher rates since the early 1990s.
In 1991-92, 3.5 per cent of UK adults (1.6 million) paid the 40 per cent higher rate of income tax. By 2022—23, 11 per cent (6.1 million) were paying higher rates, the report added.
The six-year freeze to income tax allowances and thresholds which started in April last year could become the single biggest tax-raising measure since former chancellor Geoffrey Howe raised VAT in 1979, according to the institute.
The freeze will also compound challenges facing the many workers whose earnings are not keeping up with inflation, the IFS said.
UK Chancellor says 'best tax cut right now is a cut in inflation' — video
“By 2027—28, 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,” the report said.
“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 ($16,000), which is the amount of income someone does not have to pay tax on.
For the 40 per cent 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 level set by the UK government at £50,271, the report added.
People living in Scotland have different income tax bands.
The IFS said it had taken the bands in Scotland into account in its calculations, to include both those paying the Scottish higher tax rate (at 42 per cent) and the Scottish top rate (at 47 per cent) as well as those paying the higher rate (40 per cent) or additional rate (45 per cent) elsewhere in the UK.
Inflation around the world — in pictures
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People queue to buy wheat flour at government-controlled prices in Islamabad. Pakistan's economy has been hit hard by a political crisis, as well as devastating floods and the global energy crisis, with the rupee plummeting and inflation at decades-high levels. AFP -
A market in Rio de Janeiro. Brazil's inflation ended 2022 with a sharp slowdown from double-digit peaks seen throughout the year. Reuters -
A market in Istanbul. Turkey's inflation at the end of 2022 stood at 64. 27 per cent, the country's Statistical Institute said, while the independent group of inflation researchers ENAG calculated it at 137. 55 per cent. EPA -
A Walmart in New Jersey. According to a poll, US Republicans and Democrats have distinct views of what’s most important for the government to address amid high inflation. More Republicans name gas and food prices, energy and immigration, while Democrats focus on health care, climate change and poverty. AP -
A used car sales lot in California. US Federal Reserve officials have indicated it’s possibly too early to declare victory over inflation. AFP -
A person walks by a sign showing interest rates at a bank in New York. EPA -
A woman walks with purchases past a store in Berlin. In December, consumer price growth across the Euro zone slowed to 9.2 per cent from 10.1 per cent a month earlier, Eurostat data showed last week. AP -
Workers sit in front of a banner reading "Stop the Inflation Monster" at the Burchardkai Container Terminal as they go on strike for higher wages at the harbour in Hamburg, Germany. Reuters -
Price tags at a market in Nice, France. Reuters -
Commuters cross Waterloo Bridge in London. The British Retail Consortium said spending in store chains rose by 6.9 per cent in annual terms in December, but this was a long way off consumer price inflation, which hit 10.7 per cent in November. Reuters -
Jobseekers in Johannesburg. South Africa’s governing party wants the central bank’s mandate broadened to shore up the economy and promote employment in addition to its existing task of tackling inflation. Reuters -
Social grant recipients stand in a queue outside a post office, as joblessness takes its toll in Meadowlands, South Africa. Reuters
“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,” said Isaac Delestre, a research economist at the IFS.
He said the freeze to thresholds “is supercharging that process”.
“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,” he added.
A Treasury representative said: “After borrowing hundreds of billions to support the economy during the pandemic and [Russian President Vladimir] 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 three million of the lowest earners out of paying income tax altogether.”
