The Institute for Fiscal Studies has calculated that the UK’s six-year freeze in the cash value of income tax thresholds will become the single biggest tax-raising measure since the 1970s. The report emphasised the hugely increased scope of higher rates of income tax over the last 40 years.
Gary Smith, Partner in Financial Planning at wealth manager Evelyn Partners, said:
“Millions are being dragged into the higher 40p rate of income tax, with the burden spreading to those in jobs like teaching and nursing, and trades like electricians. Amazingly the report finds that if the same proportion of the working population now paid the 40p rate as paid it 40 years ago, then only those who earned over £100,000 would now be paying the higher rate.”
The report says that in 1991-92, only 3.5 per cent of adults paid the 40p rate. This will increase to 14 per cent by 2027, or 7.8 million adults.
“This, together with some cliff-edge marginal rates at the levels of £50,000, where child benefit start to be withdrawn, and £100,000 – where an effective rate of 65% kicks in due to the withdrawal of the personal allowance – create some significant disincentives to advancement and the drive to boost earnings.
“One of the few ways to mitigate these effects is to increase pension saving, because pension tax relief means that you get to keep more of your gross income – although this can depend on how you eventually access your savings and what tax rate you pay at that point. This is especially the case with salary sacrifice schemes, where the employee gets the benefit also of National Insurance relief, and often an extra boost from their employer’s NI savings. Moreover, the salary sacrifice could mean the employee avoids crossing a threshold into the higher tax bracket or into one of the punitive marginal tax traps.
“Moreover we are already seeing an increase in the range of other salary sacrifice and non-taxable benefits being offered by employers in order to attract and retain staff, and this trend look like it will only build.”
