Here's how you could be dragged into Jeremy Hunt's 'stealth tax'
What's happening? The government is pulling off one of the biggest "tax raids" in 44 years without even needing to increase the rate people pay.
A six-year freeze on tax-free allowances and income tax thresholds, introduced in April last year and extended in the Autumn Statement, effectively means chancellor Jeremy Hunt is letting inflation do the work for him.
The policy, which was introduced by Rishi Sunak when he was in charge of the Treasury, is set to become the single biggest tax-raising measure since former chancellor Geoffrey Howe doubled VAT in 1979.
At the time, many experts warned the announcement was in effect a "stealth tax", with cost-of-living focused website Nous describing it as a "big catch' with "massive consequences for workers"
At a time when CPI inflation remains stubbornly high at 10.1% amid a cost of living crisis, the so-called "stealth tax" will leave taxpayers even more squeezed - particularly middle earners.
The respected Institute for Fiscal Studies (IFS) has now put some numbers to these warnings — and it doesn't make for pretty reading, especially if you're a middle earner.
What are the income tax brackets?
Taxpayers are given a tax-free personal allowance of £12,570. A chunk of their earnings that they do not have to pay any tax on.
Anything they earn above that figure, up to £50,270, is taxed at the basic rate of 20%. Anything people earn between £50,271 to £125,140 is put in a higher tax bracket of 40%.
Any annual income over £125,140 is taxed at 45%. These figures apply to all of the UK except for Scotland, which has its own set of rates.
Here's Why Rishi Sunak Pays A Lower Overall Tax Rate Than Keir Starmer (HuffPost UK, 3 mins)
Why are more people being pulled in by the stealth tax?
The freeze to thresholds will push more people into higher tax brackets as salaries are increased in an attempt to keep up with inflation.
By choosing not to raise personal allowance thresholds in line with inflation - last measured at 10.1% - taxpayers are effectively left with less in their pockets - while the Treasury increases the amount it takes in.
The IFS explains that income tax thresholds have been increased in line with inflation by default since the 1970s, but the government tipping this balance will push people into higher brackets. As most salary increases have been modest compared to inflation, this will leave many poorer in real terms.
This freeze will compound the challenges facing workers, whose earnings have not been keeping up with inflation.
One third of the expected record fall in household incomes this year is likely to be a result of this tax rise.
— Institute for Fiscal Studies (@TheIFS) May 16, 2023
Sunak's move last year allowed him to increase tax receipts without having to break a Conservative Party manifesto pledge not to raise the rates of National Insurance, Income tax or VAT.
It has, however, prompted backlash among backbenchers, with Tory grandee Jacob Rees-Mogg telling the Express: “When inflation is high, people really begin to see a decline in living standards. This is going to become more of a political problem."
Tory backlash as one in five will be paying higher income tax rate by 2027 (The Independent, 3 mins)
How many people are affected?
According to the IFS, the number of people paying income tax at 40% or above will reach 7.8 million by 2027–28 – that’s one in five taxpayers and 14% of the adult population.
Of that 14%, 3.1% of adults (1.7 million) will face marginal tax rates of either 45% or 60%, which is almost as large as the 3.5% share of those paying 40% at the start of the 1990s.
The Treasury's freeze last year was based on a lower forecast for inflation, having initially expected to bring in an extra £8bn. IFS director Paul Johnson said: “With much higher inflation forecasts, it looks like being a massive £21bn tax rise – two-and-a-half times bigger than intended.”
Jeremy Hunt rakes in £40 billion more in income tax and NI as stealth taxes hit millions of workers, experts say (Evening Standard, 3 mins)
Which professions are likely to be affected?
The IFS has projected that, by 2027-28, more than one in eight nurses will be paying higher tax rate - compare to practically none in the early 1990s.
By the end of Sunak and Hunt's tax freeze, one in six machinists and fitters, one in five electricians and one in four teachers are set to be in a higher bracket, compared to 5-6% 30-odd years ago.
Police officers, architects and surveyors, and legal professionals are all expected to see significant increases in their share of tax over time, with almost half of the latter two set to pay higher-rate tax in 2027-28.