Numbers paying top rate soar in stealth tax grab

The number of workers paying the top rate of tax will more than double if, as widely predicted, the freeze on thresholds is extended for another two years, experts say. 

Chancellor Jeremy Hunt and Prime Minister Rishi Sunak are exploring ways to balance the books ahead of an eagerly-awaited update on the parlous state of the public finances next month. 

Among the options to plug an estimated £40billion hole in the Government’s accounts is a two-year extension to the current freeze on income tax thresholds. 

The move could net the Treasury an extra £30 billion in ‘stealth’ taxes if the thresholds are frozen until 2027-28. 

When Sunak was Chancellor, he introduced a four-year freeze on tax thresholds in his 2021 Spring Statement – pegging the threshold at which people pay the 40 per cent rate at £50,271 and the 45 per cent top rate at £150,000. The personal allowance – the point at which workers start paying income tax – was also frozen, at £12,570 from April 2022 until 2025-26. 

The move, which largely passed under the radar, was announced before inflation took off and was initially estimated to cost taxpayers £8billion. But the true cost has been rocketing due to escalating prices, with inflation now at over 10 per cent. 

Extending the freeze for another two years will drag another three million workers into higher income tax bands, according to the Centre for Economics and Business Research (CEBR). 

It estimates the number of higher earners paying the top tax rate will be 850,000 in 2026- 27, up from 400,000 in 2019-20.

More than 100,000 of these high earners will be pulled into the top band in the current tax year alone. In a separate analysis, the Institute for Fiscal Studies recently estimated a two-year threshold freeze could raise between an extra £4billion to £5billion. 

Some 7.7million workers could be paying the 40p rate by 2025-26, compared to 4.6million if there was no freeze and thresholds rose with inflation, the IFS added. 

Hunt’s predecessor Kwasi Kwarteng had to abandon plans to abolish the 45p top rate after investors were spooked by his unfunded tax cuts.

Hunt is also considering windfall taxes on oil companies and banks. 

The Treasury declined to comment.