Tens of thousands of school teachers, nurses, and junior civil servants are among the middle-income professionals who face the threat of being dragged into paying a higher rate of tax by the end of the decade.
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.
The rates at which people start paying the basic, higher, and additional rates of tax were frozen under the previous Conservative Government in 2022, but the freeze is set to expire in 2028.
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.
Experts have said extending the freeze to 2030 would lead to people who would not regard themselves as “particularly affluent, let alone wealthy” paying the higher rate of tax.
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.
This has risen from three million in 2010, and experts said that number “could well” increase to ten million by the end of the decade, if high inflation led to high wage rises, and would include middle-earners such as teachers.
Before 2022, the £12,570 personal allowance and £50,270 higher-rate threshold rose in line with inflation each year.
If they had never been frozen, the thresholds would now be £15,480 and £62,080 respectively, according to figures from the budget watchdog, the Office for Budget Responsibility (OBR).
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”.
However, economists increasingly believe she will be forced to extend the freeze until 2030 because of weaker-than-expected growth and the Government’s inability to deliver welfare cuts. Economists have predicted that Reeves will have a hole in the public finances of up to £42.1bn and will have to raise taxes.
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.
Currently, for example, a teacher at the top end of the main pay scale can earn up to £45,350 outside of London.
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.
If this salary were to rise by three per cent per year, then by 2029, they would be earning just over £51,000, over the higher rate threshold.
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.
If the thresholds are unfrozen in 2028, the higher rate of tax would likely rise to £52,380 by 2030, according to OBR projections, though the exact figure would depend on the rate of inflation.
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.
Similarly, several civil service roles at senior executive officer level, such as content designer and project planner positions, have salaries of between £45,000 and £50,000, and would likely be pushed above the £50,270 higher rate threshold by 2030.
Despite their title, these roles are relatively junior and three grades below what is known as the senior civil service.
There are 151,680 civil servants at this level and higher executive officer level – the band below – meaning tens of thousands will likely be dragged across the higher rate threshold in the coming years.
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.
There are multiple bands above this, with the scale rising to band 9 for directors of clinical services and chief nursing officers.
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.
“Higher rate tax, once seen as the preserve of top earners, is going to be the default rate of the middle-income salaried roles, certainly not people who would regard themselves as particularly affluent, let alone wealthy.”
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.
“The main way to mitigate exposure to higher rate tax is to contribute more to a pension, though there is, of course, speculation about whether there will be an overhaul of pensions tax relief to curtail the ‘cost’ to the Treasury of these reliefs. Anyhow, for now at least this remains the best avenue to reducing an income tax liability,” he said.
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.
Stefanie Tremain, partner at accountancy firm Blick Rothenberg, said: “As salaries rise but thresholds remain frozen, more and more individuals will naturally be brought into the higher rate band.”
She added that, as well as these individuals paying more tax on their salaries, they would face other consequences too.
She said those not aware of tax relief rules – for example, on pensions – could end up paying more tax than they need to.
“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.
A Treasury spokesman said: “The OBR [Office of Budget Responsibility] will publish an updated medium-term forecast alongside the Autumn Budget – we will not speculate on their forecast.
“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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