A stark warning as four times more workers, including teachers, nurses and electricians, face higher tax rates due to a policy of fiscal drag.
An impending “tax on aspiration” could see a staggering one in five UK taxpayers forking out 40% tax within four years, according to alarming analysis by the Institute for Fiscal Studies (IFS).
A six-year freeze on income tax allowances and thresholds, which commenced last year, is projected to become the most significant tax-raising measure since the 1970s.
This policy, dubbed a “stealth tax timebomb” by critics, could see four times more workers, including teachers, nurses and electricians, paying a higher tax rate than in the 1990s.
It has led to a call for Prime Minister Rishi Sunak to act urgently, or risk presiding over a policy that could disincentivise hard work.
Former business secretary Jacob Rees-Mogg sounded a stark warning. “It’s a real problem that fiscal drag is any government’s favourite stealth tax. When inflation is high, people really begin to see a decline in living standards. It’s a stealth tax that has to go.”
Senior Tory David Jones also expressed concern. “People of moderate means are entering higher tax brackets because of frozen thresholds. This is the phenomenon of fiscal drag – a technique of Labour Chancellors, which should never be adopted by Conservatives.”
The IFS report predicts that by 2027, 7.8 million people, or 20% of taxpayers, will be paying income tax at 40% or above, a “seismic shift” compared to higher rate levels in the early 1990s. In 1991, only 3.5% paid the higher rate, but by 2022, the figure had risen to 11%.
Despite criticism, the Treasury defended its fiscal approach. A spokesman stated: “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. To support working families, we have doubled the tax-free Personal Allowance, taking 3 million of the lowest earners out of paying income tax altogether.”
The current situation underscores a growing concern about the impacts of fiscal drag on the UK’s middle earners, with experts warning of serious implications if not addressed immediately.