More workers will be paying tax at higher rates

One in five workers will be paying higher rate income tax in four years time, according to new data by a key think tank.

Because of the freeze on thresholds the number of people paying income tax at 40% or above by 2027–28 will reach 7.8 million – one in five taxpayers and one in seven of the adult population. In Scotland, the higher band rate is 42%.

This is a near-quadrupling of the share of adults paying higher rates since the early 1990s, says the Institute for Fiscal Studies.

The IFS says this represents a seismic shift and will pile pressure on Prime Minister Rishi Sunak from disgruntled Tory backbenchers to bring forward tax cuts.

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. A a third of the expected record fall in household incomes this year is likely to be a result of this tax rise.

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, says the IFS.

In 1991-92, only 3.5% of adults paid the 40p rate. This will increase to 14% by 2027. For the 40% rate (42% in Scotland) 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 England & Wales or £43,662 in Scotland.

Scotland’s First Minister Humza Yousaf has indicated that he will introduce another rate band to tax higher earners. Last Friday, the Finance Secretary Shona Robison told the Chartered Institute of Taxation lunch in Edinburgh that she will consult with professionals on devising tax policy..

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.

“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.’