Extra 1.5m hit by top tax rate
A RECORD number of workers have been dragged into the higher rate tax trap, according to official figures.
The percentage of people paying income tax at 40 per cent or the additional rate of 45 per cent has doubled in 20 years from just one in 12 in the mid-1990s to one in six – or about five million – now.
About 1.5 million have been dragged into the higher bands by so-called stealth taxes in the past five years, analysis of HM Revenue & Customs data found.
There are 400,000 people paying the top rate of 45 per cent, which is levied on incomes over £150,000 a year.
They raise almost as much for the Treasury coffers as the 25 million people on the basic rate of 20 per cent.
Overall, the 4.87 million people paying either higher or additional rates of tax are responsible for two-thirds of total income tax receipts.
John O’Connell, of the Taxpayers’ Alliance, said: “It is a stealth tax on working families. It’s about time politicians gave the country a break and cut their taxes so they can keep more of the money they earn.”
The failure of governments to raise the starting point of the 40 per cent band in line with earnings means that thousands of experienced nurses, teachers and police officers who a generation ago would have paid basic-rate tax are now higher-rate taxpayers.
The HMRC figures show 4.51 million people paid 40 per cent tax and 362,000 paid 45 per cent. This compares with 1995/96 when 2.13 million paid the then highest 40 per cent rate.
Former pensions minister Sir Steve Webb said the statistics mean one in six taxpayers paid at least 40 per cent, compared with one in 12 in the 1990s.
Sir Steve, now policy director at Royal London, which prepared the analysis, said: “To double the number of people paying income tax at higher rates is to make a profound change to the tax system. Changes of this sort should be openly and honestly debated, not delivered by stealth.”
The starting income threshold for the 40 per cent rate will rise to £45,000 this month and HMRC estimates this will lead to a slight drop in higher-rate payers.
But it is still more than two-and-half times above the 1.7 million people paying the rate in 1994. While this will cut tax receipts it is offset by a move to hike the 12 per cent National Insurance Contribution limit to £45,000.
The Tories’ 2017 manifesto pledged to increase the threshold for the 40 per cent rate to £50,000.
The new tax year begins this Friday, April 6, when an increased tax-free personal allowance should see take-home pay go up.
The personal allowance in the basic rate band – those on salaries between £11,501 and £45,000 – will rise to £11,850. The Treasury has said the changes would represent a £1,075 drop in tax paid by the typical taxpayer in 2018-2019.
The average worker on the national living wage will take home more than £3,800 extra in the new tax year.
The Treasury said: “From April, over 500,000 individuals will be taken out of paying the higher rate – a reduction of more than 10 per cent compared to 2015-16.”