Chancellor Rachel Reeves could be forced to U-turn and extend the freeze on income tax thresholds to 2030 to plug a multi-million pound hole in the public finances, economists have warned.
Freezing these thresholds is often referred to as a “stealth tax” because as wages grow, more people are pulled into paying higher rates of tax despite the cost of living also increasing.
Currently, around seven million workers are higher rate taxpayers, paying 40 per cent income tax on every extra pound earned, as opposed to the 20 per cent basic rate.
Before 2022, the £12,570 personal allowance and £50,270 higher-rate threshold rose in line with inflation each year.
In last October’s Budget, Reeves said that extending the freeze would raise “billions of pounds” but added that she decided against it because it would “hurt working people” by taking “more money out of their pay slips”.
If Reeves u-turns on income tax thresholds, then experts say that those in middle-earning jobs would likely be forced to pay the higher rate of income tax because their salaries would rise each year to keep up with inflation, but the tax thresholds would not.
Those on this sort of salary are generally classroom teachers who have five or more years’ experience but have not progressed on to the upper pay scale and do not have leadership positions like deputy headship or head of year roles.
Median pay for school teachers overall sits at £49,084 – a salary which will almost certainly be dragged above the £50,270 threshold in the coming years.
Some more senior teachers already pay the higher rate of tax, and more teachers in London who are already paid higher amounts could be pushed even further above the higher rate threshold.
Despite their title, these roles are relatively junior and three grades below what is known as the senior civil service.
Some band 6 employees in the NHS, who would include some charge nurses and midwives, earn up to £46,580 if they are experienced and outside of London, could see their wages pushed above the £50,270 threshold in the next few years.
Jason Hollands, managing director at Evelyn Partners, said: “Above target inflation coupled with wage pressures is going to inevitably draw significant numbers of people across tax thresholds.
Mr Hollands added that some workers could escape paying the higher rate of tax by diverting money into their pensions, as money paid into retirement savings comes with tax relief.
He said the number of people in the higher tax bracket “could well” rise to 10 million by the end of the decade, if high inflation led to high wage rises.
She added that, as well as these individuals paying more tax on their salaries, they would face other consequences too.
“Another implication will be that the number of couples able to benefit from the married couples allowance will be reduced, as this is only available if one spouse has unused personal allowance and the other is a basic rate taxpayer,” she said.
“As set out in the Plan for Change, the best way to strengthen public finances is by growing the economy, which is our focus. Thanks to our planning reforms, the OBR has said that the economy is expected to grow by the end of the decade.”
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