Tax grab may hit hardest for ‘middle England’

Sunak’s freeze on earnings threshold until April 2026 is a ‘political risk’, suggests fiscal think tank chief

ONE in six people will be paying the higher income tax rate by next year, it emerged yesterday as analysts warned “middle England” will bear the brunt of the Budget tax raid.

That figure is a stark jump from the early Nineties, when just one in 15 people paid the higher level of income tax.

The rise is in part the result of Rishi Sunak’s decision to freeze income tax thresholds from next year until 2026.

The move will drag around one million people into the 40 per cent tax band, which starts when a person’s earnings are more than £50,000. A further 1.3million will start paying tax on income for the first time.

The Chancellor’s decision to freeze the thresholds is a reversal of one of his Tory predecessors, George Osborne, who repeatedly increased the amount you could earn before paying any tax.

Paul Johnson, director of the Institute for Fiscal Studies (IFS) think tank, said Mr Osborne’s policies had protected middle earners in the wake of the 2008-09 financial crisis. He warned that may stop being the case now.

“Note that those increases in the allowance over the 2010s were key to ensuring the remarkable result that middle earners did not lose out from austerity in terms of higher taxes and lower benefits,” Mr Johnson said of Mr Osborne’s policies.

About the new income tax threshold freezes, he said: “This rise will hit ‘middle England’. A political risk perhaps.”

The threshold above which people pay 20 per cent income tax will rise to £12,570 but stay there until April 2026. The threshold for 40 per cent income tax will rise to £50,270 before freezing for the same duration. The change does not strictly break the Conservatives’ 2019 manifesto pledge not to raise the rates of income tax, but will see billions of pounds more flowing into the Treasury from income tax.

The money comes as people’s wages rise with inflation but the thresholds remain fixed, meaning more people are paying the higher rates of tax.

Mr Sunak defended the measure during his round of broadcast interviews yesterday, arguing the measure hit higher earners more than those lower incomes.

“Freezing personal tax thresholds is a progressive way to raise money,” Mr Sunak told Sky News.

“I think crucially what people need to understand is that no one’s takehome pay that they have today is affected or lowered by this policy.

“What it does do is remove the incremental benefit that they might have experienced in future as inflation fed through to their wages.”

Analysis by the IFS showed that while the tax change was progressive – meaning hitting higher earners disproportionately more than lower earners – an increase in the overall income tax rates would have been even more progressive.

The think tank also broke down the figures on how many people would be in the higher income tax bracket in the coming years compared to decades ago.

Just 1.6million people in 1991-92 were paying income tax in the top bracket. That was the equivalent of around one in 16 people.

But by 2022-23, an estimated five million people will be paying the higher rate. That equals around one in six.

Anneliese Dodds, the shadow chancellor, initially indicated that Labour would back the four-year freeze, saying on Wednesday: “In principle, we are not against the freeze.”

Yesterday, she adopted a different line in the Commons, asking: “What action will the Government take to protect people when the income tax personal allowance is frozen next year?”