UK Tax Squeeze: Millions More to Face Higher Rates by 2027

In a move that’s stirring up concerns for many, recent analysis indicates a looming expansion in the number of individuals subjected to higher-rate income taxes in the UK. The increase is a result of the government’s tactics to boost its revenue, tactics that some are dubbing a “stealth tax raid.”

A Surge in Higher-Rate Taxpayers

The Institute for Fiscal Studies (IFS) recently shed light on the government’s fiscal strategy, predicting a significant surge in the number of higher-rate taxpayers over the next few years. By the 2027/28 financial year, the IFS anticipates that nearly 8.9 million people, or one in six adults, will fall into this category, up from 4.4 million in 2021 and a mere 3.2 million in 2010 at the end of the last Labour government’s reign.

This forecast signals a substantial shift from the past, where the higher rate of income tax was once the burden of a far smaller segment of the population – covering only 1.7 million individuals back in 1990/91.

The Hidden Weight of the Tax Freeze

This leap is largely due to the government’s decision to freeze income tax thresholds for several years, a move initiated in 2021 and later extended by Chancellor Jeremy Hunt. The freeze implies that even those with salaries rising only at the pace of living costs will soon find themselves netted into the 40% tax bracket, applicable to incomes over £50,270. Also, those with incomes above £125,140 will face a 45% tax.

More startling is the revelation by the IFS that this strategy equates to a massive £52 billion tax hike, significantly hampering the already sluggish growth in take-home pay. This approach will result in 6.5 million more income tax payers overall and 4.5 million more higher and additional rate payers than in 2020.

Had the government chosen a different route, allowing tax thresholds to inflate naturally, the higher-rate tax would only affect individuals earning over £63,975 by 2027/28. The IFS emphasizes that due to the freeze, the number of higher-rate taxpayers will be a staggering 80% higher than if thresholds had kept up with inflation.

A Tightening Financial Outlook

Despite mounting pressure from Tory MPs for tax reductions, Chancellor Jeremy Hunt seems to have little room for manoeuvre, given the UK’s tightening financial straits. The upcoming Autumn Statement is expected to be a platform for “difficult decisions,” rather than relief, as public finances continue to deteriorate amidst soaring debt interest payments and a gloomy economic growth outlook.

The scale of this indirect tax hike overshadows other tax-raising measures witnessed in recent history. To put it into perspective, the VAT increase from 17.5% to 20% in 2010 will contribute less than half of this stealth tax’s amount by 2027/28.

The total impact of the tax threshold freeze has been aggravated by higher inflation, further extensions of the policy, and its application to national insurance contributions. Initially, this strategy was projected to contribute £8.2 billion annually to government coffers by 2025/26. However, current projections using the Bank of England’s recent inflation forecasts are pitching the figure at £52 billion, 40% more than what was anticipated earlier this year.

What Lies Ahead

Though the current plan is to maintain the freeze until the 2027/28 financial year, the IFS hints that plans could change. Should the Chancellor yield to calls to terminate the freeze sooner, the Treasury’s windfall would reduce by £5 billion. Nonetheless, Hunt has conveyed intentions to eventually reduce the tax burden, cautioning that there are no shortcuts to achieving this, especially with the tax load set to hit historic highs not seen since World War II.

In a nutshell, the forecast paints a grim picture for UK taxpayers, particularly the middle earners, who will be hardest hit by these stealthy fiscal adjustments. The situation calls for keen public awareness and discourse on the country’s tax policies and their long-term implications on everyday citizens.