Who will pay higher UK income tax rates? IFS analysis of Chancellor Jeremy Hunt freeze explained

New research by think tank the Institute for Fiscal Studies (IFS) has found a fifth of all taxpayers could end up paying higher rates of income tax by 2027/28. The 40% tax rate applies to any earnings between £50,271 and £125,140. It means 40p in every pound earnt within this threshold goes to HMRC.

It comes after Chancellor of the Exchequer Jeremy Hunt announced in his Autumn Statement 2022 that income tax bands would remain frozen for six years from April 2023. The move has been described as a stealth tax given wages have been rapidly increasing (although not at a pace that’s keeping up with inflation).

Hunt and his boss, the Prime Minister Rishi Sunak, have significantly increased the UK tax burden since Liz Truss was ousted as PM in October 2022. Other taxes that have been hiked include capital gains tax and corporation tax. So, how has income tax changed - and who is likely to be paying more tax as a result?

Why did income tax technically rise?

Income tax is the tax everyone has to pay on their salary. For all UK nations, other than in Scotland where income tax is devolved, it has four bands:

• Personal allowance (no tax on any earnings up to £12,570, unless you pay the top rate)
• Basic rate (20% on anything you earn between £12,571 and £50,270)
• Higher rate (40% on anything from £50,271 to £125,140)
• Top rate - also known as 45p rate (anything over £125,140 and you also do not get a personal allowance)

In Scotland, there is a ‘starter rate’ (19% on anything between £12,571 and £14,732) and an ‘intermediate rate’ (21% on anything from £25,689 to £43,662). The basic rate (20%) sits between these bands, while the higher rate (42%) kicks in from £43,663.

In his Autumn Statement 2022, Jeremy Hunt froze England, Wales and Northern Ireland’s bands until April 2028 in a bid to raise more for the Treasury so that he could abide by his self-imposed fiscal rules. He also lowered the threshold of the top rate of tax from £150,000 to £125,141.

Given wages have been rapidly increasing (albeit well below the rate of inflation), keeping the thresholds where they are means more people are likely to fall into higher bands between now and 2028. It also means the personal allowance is set to become much less generous.

Hunt described the move as a freeze, but this obscures the fact that it is technically a tax hike. It is why some have called it a stealth tax rise.

Meanwhile, in Scotland, they have also frozen thresholds for most taxpayers while also upping the rate for higher earners. The higher rate and top rate rose by a percentage point each to 42% and 47% respectively.

Who will pay more income tax?

In an analysis of the income tax changes that was published on Tuesday (16 May), the IFS estimated 20% of all workers - around 7.8 million people - will be paying at least the higher rate of the tax by April 2028. This figure equates to 14% of the entire adult population and includes Scotland.

According to the IFS, in the 2022/23 tax year 11% of UK adults (6.1 million workers) were paying a rate of 40% or above. More than 30 years ago, there were only 1.6 million people (3.5% of adults) who topped the threshold. If the country was to return to that proportion of higher rate payers, the threshold would have to be set at almost £100,000 by the 2027/28 tax year.

The IFS said the tax band ‘freeze’ equated to the single largest tax-raising measure since Margaret Thatcher-era Chancellor Geoffrey Howe hiked VAT in 1979. It said many key workers would be dragged into paying more tax.

“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,” the IFS report stated. “Among police officers, architects and surveyors, and legal professionals, we also see significant increases in the share paying higher rate tax over time, with almost half of the latter two groups expected to be paying [the] higher rate in 2027-28.”

Reacting to the findings, Isaac Delestre - an IFS research economist - said freezing income tax was “a political choice as much as an economic one”, and that it meant the system was now “hostage to the vagaries of inflation” with the rate of price rises determining how big or small the freeze would end up being.

He said: "For income tax, the story of the last 30 years has been one of higher-rate tax going from being something reserved for only the very richest, to something that a much larger proportion of adults can expect to encounter.” He added that the freeze “is supercharging that process."

In response, a spokesperson for the Treasury sought to justify the move, saying: "After borrowing hundreds of billions to support the economy during the pandemic and Putin’s energy shock, we had to take some 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."