Inflation may leave million more workers paying 60 per cent tax

Rishi Sunak has told the cabinet that interest rates are expected to increase to 2.5 per cent over the next year as he warned ministers against borrowing more to fund public spending.

A glitch in the personal tax allowance regime combined with pay rises triggered by inflation will push a million more high-earning workers into a 60 per cent bracket.

The situation was described over the weekend as scandalous by a senior tax specialist, who called on ministers to iron out a 14-year-old wrinkle in the system. The prediction is based on present levels of wage growth.

Expert analysis has shown that about 950,000 people in Britain earn annual salaries of between £75,000 and £100,000. However, if those people receive pay rises it may push them into the £100,000 to £125,000 bracket. Workers earning between these amounts lose their £12,570 tax-free personal allowance on a sliding scale.

Broadly, that means every £1 earned in that bracket incurs income tax at 60 per cent. Analysis published in The Sunday Telegraph found that about 336,000 people fall into that bracket but that number is set to increase considerably. The researchers said that annual average wage growth is at 7 per cent, which means that those earning salaries of £93,500 who are awarded the average pay increase will be pushed into the 60 per cent tax bracket.

Those earning £75,000 would potentially click over into the 60 per cent rate within the next five years, while those now earning £81,000 would be likely to move into that tax bracket within the next four years.

The newspaper’s analysis said that if the system was not reformed, significant numbers of workers would move into the higher tax rate even if average wage growth drops back to its ten-year average of 3 per cent. On that basis, those earning salaries of £90,000 would be pushed into the higher tax rate within three years, while those earning £75,000 would take nine years to move into the bracket.

The provision that created the anomaly for those earning between £100,000 and £125,000 was introduced by the Labour government in 2007-08.

“It was scandalous when this stealth tax was introduced, but it didn’t affect that many people so they got away with it,” Miles Dean, head of international tax at the consultancy firm Andersen, said. At the time the so-called taper was introduced, fewer than 650,000 earners had incomes of more than £100,000. In 2019-2020 that figure had risen to 980,000.

Dean argued that it was “still scandalous that the government of the day continues to punish individuals in this income bracket by removal of their personal allowance with no justification”. He said that the cost of living crisis, with inflation running at a 40-year high of 9 per cent as of last month, “brings the iniquity of this part of the tax regime into sharp relief”.

“Hopefully, enough people will see the light and demand that this insidious policy is removed,” he said. “It would be even better were the government to realise this and act on its own, but pigs might fly.”

Last year Rishi Sunak, the chancellor, froze all personal tax bands. A Treasury spokesman told the Telegraph that the move was needed to “rebuild the public finances” in the wake of expenditure during the coronavirus pandemic.

The spokesman added that the government was aware of the effect of the taper on tax rates but said it was focused on providing “greater support for those on low and middle incomes”.