More than two million people have become higher-rate taxpayers under Boris Johnson’s government, fuelling a backlash from Tory MPs.
Figures released by HM Revenue & Customs yesterday showed that 6.1 million people — equivalent to one in six adults — now pay at the 40 per cent rate, up from 4.2 million in 2019. They include 629,000 who pay the highest level of income tax — 45 per cent on earnings above £150,000 — up from 421,000 in 2019-20.
It will add to concern among Tory MPs that the Conservatives’ reputation as the party of low taxation is under threat. More people have been dragged into paying the higher rate because of a decision by Rishi Sunak, the chancellor, to freeze the income tax personal allowance and higher-rate threshold.
The Institute for Fiscal Studies has said that the four-year freeze at £50,271, announced in the budget last year, could raise as much as £13 billion in part because of soaring inflation.
LCP, a consultancy, projected that the number of higher-rate taxpayers would increase by another million before the end of this parliament because wages and pensions are expected to increase rapidly.
Sir Steve Webb, a partner at LCP and a former Liberal Democrat pensions minister, said: “Paying higher-rate tax used to be reserved for the very wealthiest but this has changed very dramatically in recent years.
“The starting point for higher-rate tax has not kept pace with rising incomes, and the five-year freeze on thresholds has turbo charged this trend. People who would not think of themselves as being particularly rich can now easily face an income tax rate of 40 per cent and around one in five of all taxpayers will soon be in the higher-rate bracket.”
In 2010 there were 3.26 million people in the top two bands, paying a combined £75.33 billion in income tax. In 2022-23 there will be 6.13 million, contributing £166.21 billion.
According to analysis by Blick Rothenberg, the accountancy firm, a worker who earned £80,000 in 2010 would now be on £104,838 if their earnings kept pace with inflation. This means they would now be paying £8,405 more in income tax thanks to fiscal drag.
Under the same scenario a worker on £48,000 in 2010 would now be paying an extra £3,463 in income tax, despite being no wealthier in real terms than they were 12 years ago.
Johnson and Sunak will resist calls from Tory MPs to announce tax cuts in a joint economic speech expected next month that will set out the government’s economic strategy. They are under pressure from cabinet ministers and backbenchers to help people with the cost of living.
Government sources previously suggested that Johnson and Sunak would announce a broad timeline for future tax cuts in an effort to alleviate pressure from Tory ranks. However, any announcements will now be delayed until the autumn budget at the earliest.
Johnson and Sunak have also said that tax cuts would not be implemented while inflation remained high. They have yet to agree on the contents of the speech, which is due to be made within the next three weeks, although some in government suggest that it could be delayed further. It is expected to focus on a broad overview of the government’s economic strategy, helping to “join the dots” between varying aspects of policy.
“This speech will not be about tax cuts. They’re a matter for fiscal events,” a source involved in discussions about the speech said. “It’s about setting out a medium to long-term plan for dealing with the cost-of-living crisis.”
The prime minister believes that inflation is likely to ease early next year, providing the government with space for tax cuts. He is said to be particularly keen to reverse a planned rise in corporation tax from 19 per cent to 20 per cent and to make further reductions in income tax.
By 2025 Britain is due to have its highest postwar tax burden. Paul Johnson, director of the Institute for Fiscal Studies, said it was a “fairytale” for Sunak to suggest he had a plan to cut taxes but pointed out that the Treasury’s income remained low by European standards.
Streamlining the tax system is the way to unlock growth, he told the Future of Britain conference yesterday. “We know how to get more growth and we explicitly decide not to do it.”
Martin Lewis, the money saving expert, told the conference organised by Sir Tony Blair that Sunak had called him for advice four days before announcing his last package of support in May. Lewis said that he would resign if he were chancellor.
He added: “The number of ministers I meet who just know bugger all about the subject when they get there and you have to explain on such a remedial level when you talk to them about the subject. You can’t even begin to come up with the clever stuff, because you just trying to explain to them ‘I’m afraid it doesn’t work that way minister, not politically, but factually, you just don’t understand how this system works’.”
David Davis, the former Brexit secretary, has said that the government should prioritise tax cuts over infrastructure investment. He told Today on BBC Radio 4: “The simple truth is that there are priorities in everybody’s life and for most of the people in the red wall seats the first issue is paying the bills. If the government is stopping you doing that, that is a real problem.”