One in five taxpayers in the UK will be paying tax at higher rates by 2027 as a result of a stealth raid by Prime Minister Rishi Sunak, according to new analysis.
(Bloomberg) — One in five taxpayers in the UK will be paying tax at higher rates by 2027 as a result of a stealth raid by Prime Minister Rishi Sunak, according to new analysis.
The research by the Institute for Fiscal Studies warned that 2.5 million more people will be paying rates of 40% or more if income tax thresholds remain frozen.
The findings will increase pressure on Sunak from members of his own party, who say the Conservatives are heading for defeat at the next general election unless the government cuts taxes.
The proposed six-year threshold freeze means that many employees are being pulled into higher tax bands as wages rise, despite struggling with the worst cost-of-living crisis in generations.
The IFS estimated that a third of the expected record fall in household incomes this year is likely to be a result of so-called fiscal drag.
The policy was introduced last year to help repair the public finances in the wake of the pandemic.
In March, the Office for Budget Responsibility estimated that keeping thresholds unchanged rather than raising them in line with inflation will bring in an extra £29 billion ($36 billion) for the Treasury by the 2027-28 fiscal year.
The IFS said the decision is on course to be the biggest single tax-raising measure since Margaret Thatcher’s government doubled the rate of VAT in 1979.
“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, research economist at the IFS.
“Whether or not the scope of these higher rates should be expanded is a political choice as much as an economic one,” he added.
“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.”
The IFS estimates 7.8 million people will pay income tax above 40% by 2027-28 fiscal year.
That represents a fourfold increase in the proportion of adults paying higher rates since the early 1990s.
The squeeze on living standards has plunged Britain into the worst period of industrial strife since the late 1980s, with workers including teachers and nurses going on strike to demand better pay.
Both professions are set to feel the pinch from the threshold freeze.
The IFS estimates that while in the 1990s one in 16 teachers paid the higher tax rate, this will jump to one in four by 2027.
Meanwhile, one in eight nurses are set to be paying higher rates.
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