More than three million people were dragged into a higher tax bracket within a single year under the Treasury’s stealth tax plans, new figures have revealed – as even those earning £40,000 face the prospect of paying the 40p rate.
By the end of this decade, large numbers of “middle earners” will be paying the higher income tax rate, Rachel Reeves has been warned, reportedly prompting hundreds of thousands to deliberately push down their earnings.
Since 2021, the thresholds at which workers start paying the 20p basic rate, 40p higher rate and 45p additional rate of income tax have been frozen by first the Conservative and then the Labour governments, rather than rising each year in line with inflation.
This means that earners are pulled into a higher rate even if their wages go up only as quickly as inflation – and so do not give them additional spending power. This so-called stealth tax is expected to make as much as £55bn a year for the Treasury by 2031, when thresholds are scheduled to start rising again.
The 40p rate is applied to anyone earning £50,270 or more – meaning that those currently getting £40,000 could be liable within a few years if their income rises at the same rate as inflation.
New data from HMRC – analysed by wealth management firm Evelyn Partners – shows that in 2023-24, the last full year under the Tories, more than three million income tax payers were in a higher bracket than the year before.
The number of additional rate taxpayers was up by 324,000, while 654,000 more people were paying the higher rate. The overall number of taxpayers went up by 2.17 million – equivalent to people who had previously not paid any income tax and then became liable for the basic rate.
While anyone who got an above-inflation pay rise would have been pushed into a higher band without the thresholds freeze, those whose wages went up only in nominal rather than real terms would not have been.
The figures showed that in 2023-24, 18.1 per cent of taxpayers were paying the 40p rate or above.
David Little of Evelyn Partners said: “In real terms, everyday middle earners will be higher rate taxpayers by 2030, as opposed to the situation a decade or two ago when this band was confined to individuals regarded as ‘high earners’. Anyone considered in real terms a ‘high earner’ will by 2030 be in or staring at the top rate of tax, a charge that used to be reserved for the very highest paid elite.”
A separate freeze has been applied to the £100,000 threshold at which the personal allowance is withdrawn, resulting in an effective marginal tax rate of more than 60 per cent.
Workers are ‘purposefully keeping their earnings down’
Little warned that some workers are seeking to avoid breaching that figure, either by saving more into a pension or actively turning down higher pay.
He said: “Many earners just below the £100,000 and £125,150 income levels are purposefully trying not to increase their earnings because they don’t think the extra work is worth the meagre increase in post-tax income – especially for those who also lose tax-relieved child-care above £100,000.
“That cannot be good for economic growth or productivity in the UK.”
The Chancellor has previously said that the thresholds introduced by the Tories and extended at her last Budget are necessary to avoid having to borrow more, cut state spending or break Labour’s manifesto promise not to hike any of the main tax rates.
She has also promised to seek to reduce the tax burden when it is possible to do so, by growing the economy to provide greater funding for public services.
A Treasury spokesman said: “More people are paying higher rates of tax because thresholds have been frozen while wages rise – a policy we inherited. At the last Budget we acted to ease pressures on working people by increasing the national minimum wage, taking £150 off energy bills, and freezing prescription charges, fuel duty and rail fares. And we are keeping our promise not to raise the basic, higher or additional rates of income tax, employee national insurance or VAT.”
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