After this years Budget, one in six taxpayers will now pay tax at the higher rate of 40%. This is an increase of approximately 400,000 tax payers and takes the rise in people moving into the higher rate tax bracket to nearly 1.5 million since George Osborne became chancellor.
The 40% tax band was introduced twenty five years ago by Conservative chancellor Nigel Lawson. At the time only 5% of people fell into this tax bracket. Today it is closer to 20%. It is estimated that, unless Osborne reverses his decisions he set out in the autumn statement, the total number of people classed as higher rate taxpayers will reach a record of 4.3 million in the 2013/14 tax year.
HMRC figures show that in the 2010/11 tax year, when George Osborne became chancellor, 3.02 million people paid tax at the 40% rate. The figure rose to 3.86 million in the 2012/13 tax year and this April, when the starting point for paying 40% tax was reduced, the number exceeded 4 million. Economists call the phenomenon behind these rises “fiscal drag”.
This term applies when thresholds for paying tax fail to keep pace with growing earnings. In 1991/92, 24.1 million people paid basic rate tax and 1.6 million paid higher rate, but in 2012/13, 25 million paid basic rate tax and 3.86 million paid higher rate.
The government have stated that by criticising them for the rise in people falling into the 40% tax band, people are ignoring the more generous personal allowances that have been introduced, which mean that more of the average worker’s pay is tax-free. From April, the personal allowance rose from £8,105 to £9,440.
