Written by Rachael Griffin, tax and financial planning expert at Quilter
This morning’s personal income statistics reveal the harsh reality of how the government’s stealth tax agenda has tipped thousands of hard-working people into higher tax brackets. The frozen tax bands continue to be a critical issue within the UK’s tax system.
The pandemic had a profound impact on the economy, causing a surge wage growth due to a combination of factors including increased demand for certain jobs, supply chain disruptions, and inflationary pressures. However, despite this wage growth, the rate at which someone starts to pay higher rate tax has barely changed, moving from £50,000 to only £50,270 for the tax year 2021 to 2022 and remains that way. This minimal shift stands in stark contrast to the significant wage increases seen during this period, particularly driven by the pandemic’s economic upheaval.
The issue of fiscal drag, where income tax thresholds do not keep pace with inflation or wage growth, exacerbates this problem. This lag has led to an additional 450,000 people becoming higher rate taxpayers between the tax years 2020/21 and 2021/22, bringing the total to 4.4 million. Although nominal salaries increasing may seem a good thing, the purchasing power of these wages remains stagnant or even decreases, and individuals are subjected to higher tax rates and a loss of benefits.
The situation is even worse for families with children, who face a ‘cliff edge’ at £100,000, where their personal allowance begins to taper off, effectively creating a very high marginal tax rate for incomes between £100,000 and £125,000. This can significantly affect decisions around childcare, as the loss of child benefit (which begins to taper off when one parent earns more than £50,000) combined with higher tax rates results in a perverse disincentive for parents to work more or gain promotions, to avoid losing these vital supports. This is bad for the economy and bad for society. Similarly, when a parent earns more than £100,000 they lose access to their 30 hours of free childcare.
The problem is also evident in the number of additional rate taxpayers, who pay the highest tax rate. They have increased by 87,000 in one year, to 520,000. They contribute 36% of the total tax revenue, but they may lose their motivation to earn more if they face a heavier tax burden.
The statistics also show the huge regional disparities in income, with London and Surrey far ahead of the rest of the country. This raises doubts about the government’s ‘levelling up’ agenda, which seems to have done little to create a more balanced economic landscape across the UK.
These statistics paint a picture of a tax system in need of re-evaluation. The current approach, with frozen income tax thresholds amidst rising inflation and wage growth, seems to increasingly burden the middle and upper-middle classes without necessarily addressing the underlying economic disparities. It suggests that the government needs to reconsider its stance on tax thresholds to ensure that the tax system remains fair, encourages economic ambition, and does not unduly penalise those who are merely trying to keep pace with the cost of living.
