Steep Rise in Higher Tax Bracket Threatens Aspirations of Middle-Income Earners

Concerns grow as fiscal drag pushes more taxpayers into the 40 percent bracket

A concerning trend is emerging in the UK as a stealth tax timebomb is set to push four times as many people into the 40 percent tax bracket by 2027. The Institute for Fiscal Studies (IFS) has warned that this unexpected surge in higher-rate taxpayers, including professionals such as teachers, nurses, and electricians, could disincentivize hard work and become a “tax on aspiration.”

The analysis reveals that the six-year freeze on income tax allowances and thresholds, implemented since April last year, is poised to become the largest tax-raising measure since the 1970s. Former business secretary Jacob Rees-Mogg highlighted the issue of fiscal drag, where inflation erodes income and leads to a decline in living standards. He emphasized that this tax burden has shifted from high earners to middle-income individuals.

Conservative politicians, including senior Tory David Jones and Sir John Redwood, echoed concerns about moderate-income earners being pulled into higher tax brackets due to the frozen thresholds. They argued that this phenomenon, known as fiscal drag, had been a technique employed by previous Labour Chancellors and should not be embraced by the Conservatives. Calls were made for a low-tax Chancellor, such as Jeremy Hunt, to address the perceived unfairness.

The IFS analysis projects that by 2027, approximately 7.8 million individuals, or around 20 percent of taxpayers and one in seven of the adult population, will be paying income tax at 40 percent or above. This represents a seismic shift compared to the higher rate levels in the early 1990s, where only 3.5 percent of adults fell into this category.

Further analysis from the IFS predicts that by 2027, more than one in eight nurses, one in six machinists and fitters, one in five electricians, and one in four teachers will be subject to higher-rate tax. The report also notes significant increases in the share of police officers, architects and surveyors, and legal professionals paying higher-rate tax over time.

To illustrate the impact of inflation and frozen thresholds, it is revealed that the higher-rate threshold would need to be nearly £100,000 in 2027–28, almost double the current trigger of £50,271, to affect the same fraction of people as in 1991. This alarming trend raises concerns about the fairness of the tax system and the impact on middle-income earners’ aspirations.

Critics, such as the Taxpayers’ Alliance, have highlighted that the tax burden under the Conservative government is not significantly different from what it would have been if Jeremy Corbyn’s Labour Party had won the 2019 election. They argue that frozen tax thresholds are hindering the government’s goal of encouraging more people to return to work.

Mark Littlewood, Director General of the Institute of Economic Affairs, warns of the serious consequences of pulling more individuals into the higher tax bracket, as it may discourage work and aspiration. He believes that while the higher rate of tax was initially intended to target super-high earners, it is now affecting individuals with salaries above £50,000. Littlewood cautions that as long as government spending continues to increase, fiscal drag will likely persist, leading to low growth, high spending, and worsening taxes.

In response to these concerns, a Treasury spokesman defended the government’s position, stating, “After borrowing hundreds of billions to support the economy during the pandemic and energy shocks, we had to make difficult decisions to repair the public finances and reduce debt. It is crucial that we remain committed to this plan in order to halve inflation this year and stimulate economic growth.”

The spokesman further mentioned the government’s efforts to support working families, including doubling the tax-free Personal Allowance, which has removed income tax obligations for 3 million low earners.

The issue of an increasing number of taxpayers being pushed into the higher tax bracket remains a topic of debate, with critics emphasizing the potential negative impact on work incentives and aspirations. As the discussion continues, the government will face pressure to address these concerns and ensure that the tax system remains fair and supportive of economic growth.