Workers have been warned they will be handing over an extra £29.3bn a year in five years’ time as millions more are dragged into paying tax or higher rate taxes for the first time.
Chancellor Jeremy Hunt decided in his Budget to freeze personal tax thresholds in cash terms, rather than increasing them in line with inflation.
This creates “fiscal drag” – when taxpayers are effectively brought into new tax brackets as their pay and inflation increase.
The number of taxpayers in the higher-rate band will jump by 47 per cent, according to financial watchdog the Office for Budget Responsibility.
“Based on our latest forecasts for earnings growth and CPI inflation, these measures are expected to generate 3.2 million (9 per cent more) new taxpayers, 2.1 million (47 per cent more) new higher-rate taxpayers, and 0.35 million (47 per cent more) additional-rate taxpayers by the end of the forecast than would have been had the thresholds continued to be uprated with inflation,” the OBR experts say in their Budget commentary.
The 350,000 workers mentioned will pay the 45 per cent additional tax rate.
The fiscal drag will raise the Treasury’s tax take by £12bn more in the 2023-24 tax year than if thresholds had increased with inflation.
“Many personal tax thresholds have been frozen in cash terms since April 2021, whereas previously most were due to rise in line with CPI inflation,” the OBR said.
The tax paid will rise steadily in the next five years and by 2027-28, the government will be receiving an extra £29.3bn a year.
Tom Waters, of the Institute for Fiscal Studies, a think tank, said it was the equivalent of a £500 tax rise for a typical basic rate taxpayer and £1,000 for a typical higher rate taxpayer.
Thousands more taxpayers ended up paying higher rates between 2019-20 and 2020-21, according to figures released earlier this month.
Last summer, it was revealed that nearly 2 million more people were paying higher-rate income tax because Rishi Sunak scrapped normal increases in allowances.