An extra 1.3 million people will have to start paying income tax – and a further million will be pushed into higher rate taxation – over the next five years, according to the Office for Budget Responsibility.
While many workers will have shrugged their shoulders assuming that it will not impact on them, the OBR said it estimated that as many as 2.3 million workers would end up paying more tax – more than £8bn in total – as a result.
From 6 April, people will be able to earn up to £12,570 tax-free with the 20% rate being charged on everything they earn above that amount. Workers will pay the higher 40% rate on income above £50,270. Different rates apply in Scotland.
As wages rise, more people will find they have to either start paying income tax, or that they have unwittingly become a higher rate taxpayer. This process is known as fiscal drag.
The proportion of higher rate taxpayers is to rise from 8.7% to 11% of all adults by 2026, it said.
Becoming a higher rate payer has other implications, besides losing 40% of any pay in excess of the threshold to HM Revenue & Customs. Other benefits – such as private health care, and income from any investments – also become chargeable at 40% for the first time.
Becky O’Connor, head of pensions and savings at Interactive Investor, said: “Freezing allowances is a back-handed way of raising taxes, as wage inflation and asset price inflation increase the number of people pushed over the thresholds at which they have to pay more tax.
“Frozen allowances and thresholds have a habit of remaining fixed for many years, dragging more people into tax charges over time.”
In its report, the OBR said the tax rises announced in this week’s budget would increase the tax burden from 34% to 35% of gross domestic product in 2025-26 – the highest level since Roy Jenkins was chancellor in the late 1960s.