What the 40p income tax rise means for YOU – all you need to know
What the 40p income tax rise means for YOU – everything you need to know
- Here is everything you need to know about if you will be affected by 40p tax rise
Thousands of nurses, teachers and police officers are to be dragged into the 40p tax band as part of the biggest stealth raid in decades.
A report by the Institute of Fiscal Studies (IFS) warns that one in five taxpayers will pay the higher rate as a result of the Government’s controversial freeze on tax thresholds.
So, is income tax going up? Will you be affected by a potential rise in income tax? When will any possible hikes take place?
Read on below for everything you need to know about the 40p income tax rise.
Interest rates have continually been raised by the Bank of England since December 2021
Is income tax going up?
A report released today warned that one in five taxpayers will pay the higher rate within the next five years as a result of the Government’s controversial freeze on tax thresholds.
A report by the Institute for Fiscal Studies (IFS) think-tank reveals that the freeze in tax thresholds introduced by Prime Minister Rishi Sunak and extended by Chancellor Jeremy Hunt last year will be the biggest single tax increase since VAT was almost doubled to 15 per cent in 1979.
The study suggests the tax threshold would have to be almost doubled from just over £50,000 to almost £100,000 to return the tax band to the level intended for it.
The IFS report said the tax grab would compound the pain for people whose incomes have failed to keep pace with inflation, adding: ‘An increasing number will find themselves pulled into paying higher rates of tax even if their incomes have not grown sufficiently to keep up with inflation.’
Former Cabinet minister Simon Clarke said: ‘We think we are suffering with our income tax burden now, but this analysis shows the worst is yet to come.
‘We need to cut spending and taxes to ease the pressure on family finances, and we need to have a moment of levelling with the public that our current economic trajectory is simply unsustainable.
‘That effort needs to begin before the next election, and we need to set out a clear plan to bring income tax rates down and unfreeze the thresholds at which people pay the different rates to reflect the stealth effects of inflation.’
Why is income tax rising?
The rise in income tax is occurring due to a four-year freeze in income tax thresholds in the wake of the pandemic to help the public finances recover from the £400billion spent on Covid.
The freeze was extended by Mr Hunt for two more years in November last year – with more funds needing to be recouped from the spend on Covid – which is why a rise in income tax for many is set to come into force.
The IFS study warns that a quarter of all teachers and one in eight nurses will be paying a higher tax rate.
Around 7.8million workers will be paying 40p tax as part of the measures, which is almost five times the number of people who did so in the early 1990s, when it was seen as a tax reserved for the rich.
The freeze in tax thresholds introduced by Prime Minister Rishi Sunak and extended by Chancellor Jeremy Hunt last year, will be the biggest single tax increase since VAT was almost doubled to 15 per cent in 1979.
This move by the Government is known as fiscal drag, which occurs when inflation or income growth – in this case the former – moves a taxpayer into a higher tax bracket.
This helps to increase tax revenue without the government being required to raise tax rates.
However, it does mean that lower earners may be required to pay more tax.
A Treasury spokesman defended the freeze and said most taxpayers benefit from a tax-free allowance of £12,570, which has increased faster than inflation in recent years.
They added: ‘After borrowing billions to support the economy during the pandemic and Putin’s energy shock, we had to take difficult decisions to repair the public finances and get debt falling. It is vital we stick to this plan to halve inflation this year and get our economy growing again.’
This chart shows how people could be dragged deeper into tax rates over the coming years if their salaries rise just in line with CPI inflation, as forecast by the OBR in March
This chart shows estimates for how much tax people will pay in 2023-24, compared to what would have been due if thresholds had increased with inflation since 2021
By 2027–28, 3.1 per cent of adults (1.7million people) will be paying a marginal rate of either 60 per cent or 45 per cent – only slightly below the share of adults who paid the 40 per cent higher rate at the start of the 1990s.
The IFS said higher rate earners face paying £1,000 more in tax in the 2023-24 tax year, compared to this year. The yellow line shows the likely impact at the end of the freeze period.
This chart shows that, in the early 1990s, no nurses and about 5–6 per cent of machinists, electricians and teachers paid higher-rate tax. But by 2027–28, more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers are set to be higher-rate taxpayers
When will income tax rises come into effect?
The higher tax rate is scheduled to come into force in 2027-28.
The IFS report said the tax grab would compound the pain for people whose incomes have failed to keep pace with inflation, adding: ‘An increasing number will find themselves pulled into paying higher rates of tax even if their incomes have not grown sufficiently to keep up with inflation.
‘Individuals who become less well-off in real terms over the next five years may nonetheless see themselves facing higher rates of income tax than at the start of the period.
‘By 2027-28, more than one in eight nurses, one in six machinists and fitters, one in five electricians and one in four teachers are set to be higher-rate taxpayers’.
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