Numbers paying top rate soar in stealth tax grab
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Top rate-paying numbers rise in stealth tax grab: Threshold freeze extended for another two years, experts say
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Tax Grab: Chancellor Jeremy Hunt
The number of workers paying the highest tax rate will more than double if, as widely predicted, the threshold freeze is extended for another two years, experts say.
Chancellor Jeremy Hunt and Prime Minister Rishi Sunak are exploring ways to balance the books ahead of a much-anticipated update on the dire state of public finances next month.
One option to close a gap estimated at £40bn in government bills is a two-year extension of the current freeze on income tax thresholds.
The move could net the Treasury an additional £30bn in ‘stealth’ taxes if the thresholds are frozen until 2027-28.
When Sunak was chancellor, he introduced a four-year freeze on tax thresholds in his 2021 spring statement – setting the threshold at which people pay the 40 percent rate at £50,271 and the 45 percent top rate at £150,000. The personal deduction – when employees start paying income tax – was also frozen at £12,570 from April 2022 to 2025-26.
The move, which has largely remained under the radar, was announced before inflation kicked in and would initially cost taxpayers £8bn. But the real costs have skyrocketed due to rising prices, with inflation now over 10 percent.
Extending the freeze for another two years will drag another three million workers into higher income tax brackets, according to the Center for Economics and Business Research (CEBR).
It estimates that the number of higher earners paying the highest tax rate will be 850,000 in 2026-27, up from 400,000 in 2019-20.
More than 100,000 of these high earners will be pulled into the top tier in the current tax year alone. In a separate analysis, the Institute for Fiscal Studies recently estimated that a two-year freeze on the threshold could lead to an additional £4 billion to £5 billion.
About 7.7 million workers could pay the 40p rate by 2025-26, compared to 4.6 million if there were no freezes and thresholds rose with inflation, the IFS added.
Hunt’s predecessor Kwasi Kwarteng had to abandon plans to scrap the 45p top rate after investors were shocked by his unfunded tax cuts.
Hunt is also considering windfalls on oil companies and banks.
The Treasury Department declined to comment.