The number of people paying income tax at 40% or above will reach 7.8 million by 2027–28, new research has revealed. That means one in five taxpayers and one in seven adults are set to be higher-rate taxpayers.

The Institute for Fiscal Studies (IFS) – which carried out the research – said the increase in the share of adults paying higher rates since the early 1990s was a “seismic shift”.

The findings also show that essentially no nurses and just one in 16 teachers paid higher-rate tax in the 1990s, but by 2027–28 more than one in eight nurses and one in four teachers are set to be pulled into the higher rates.

Income tax freeze

The six-year freeze to income tax allowances and thresholds started in April last year. (The personal allowance – when income tax begins to be due – remains at £12,570. And the higher-rate threshold – when taxpayers start to become liable for the 40% rate – stays at £50,270.)

The freeze is set to represent the largest single tax-raising measure since Geoffrey Howe near-doubled the rate of VAT in 1979.

The IFS said the freeze would play a major role in expanding the reach of higher rates over the coming years and would compound the challenges facing the many workers whose earnings weren’t keeping up with inflation.

What else has the research revealed?

Other findings in the IFS report (A deepening freeze: more adults than ever are paying higher-rate tax) include:

  • In 1991–92 3.5% of UK adults (1.6 million) paid the 40% higher rate of income tax. By 2022–23 11% (6.1 million) were paying higher rates, with that figure set to reach 14% (7.8 million) by 2027–28.
  • Of that 14%, 3.1% of adults (1.7 million) will face marginal tax rates of either 45% or 60% (the 60% rate kicks in at £100,000 and the 45% rate at £125,140.) That’s almost as large a share as paid the 40% higher rate at the start of the 1990s.
  • For the 40% rate to impact the same fraction of people as it did in 1991, the higher-rate threshold would need to be nearly £100,000 in 2027–28 – almost double its actual level of £50,270.

Isaac Delestre, Research Economist at the IFS, said: “For income tax, the story of the last 30 years has been one of higher-rate tax going from being something reserved for only the very richest, to something that a much larger proportion of adults can expect to encounter.

“Alongside the fact that 1.7 million people will be paying marginal rates of 60% and 45% in the next few years, this represents a fundamental and profound change to the nature and structure of our income tax system.

“The freeze to thresholds is supercharging that process, pulling an additional 2.5 million more people into paying rates of 40% or more by 2027–28.

“Whether or not the scope of these higher rates should be expanded is a political choice as much as an economic one, but achieving it with a freeze leaves the income tax system hostage to the vagaries of inflation – the higher inflation turns out to be, the bigger impact the freeze will have.”

Our thoughts on the higher rates of tax

The trend of more people paying the higher rates of tax will continue into the near future because of the freeze on income tax thresholds.

It’s a stealthy way of increasing the tax take without the mass electorate realising there’s effectively been a tax increase.

This method isn’t particularly new; it’s been used by successive governments over the years. But it does have the effect of raising more tax without a lot of people realising what’s happening.

And given our current economic climate, it looks like we’ll be stuck with this tax-raising technique for some time to come.

Need specialist tax advice?

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Steph Churchill

Stephanie Churchill

Managing director & co-owner of Churchill Taxation