One in five Brits will be pushed into the 40% income tax bracket by 2027, new reports claim.
A six-year freeze in income tax allowances and thresholds was introduced last month. It means mean more lower earners will be paying the higher-rate of income tax.
Fiscal drag means tax revenue is increased without the government having to raise rates. And the Institute for Fiscal Studies has labelled the move a “seismic shift”.
That’s because jobs that aren’t traditionally regarded as making those that perform them wealthy will be included.
‘Big impact’
According to Sky News, 3.5% of UK adults paid the 40% higher-rate of income tax in 1991/92. That works out at 1.6 million people. By 2022/23, 6.1 million found themselves in the higher bracket, which works out at 11% of the population. By 2027, that will be closer to 20%, going by estimates.
IFS research economist Isaac Delestre 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.
He continued: “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.”
Who will be affected by 40% tax change?
By 2027/28, the IFS believes more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers will become higher-rate taxpayers. Additionally, half of surveyors and legal professionals will also be paying higher-rate tax.
A Treasury spokesperson commented: “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 three million of the lowest earners out of paying income tax altogether.”
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