Chancellor Jeremy Hunt announced a raft of tax increases in his Autumn Budget, as the government seeks to weather the economic storm.
In his speech to the House of Commons, the Chancellor said the UK economy was already in recession and was forecast to shrink by 1.4% in 2023, forcing the government to take “difficult decisions.”
To balance the books, Hunt has announced that the threshold for the 45% additional rate of tax will be lowered from £150,000 to £125,140.
Currently, anyone earning between £50,271 and £150,000 pays 40% tax, while those earning £150,000 and above pay 45% tax.
The change is expected to pull a further 250,000 people into the top rate.
Shaun Moore, financial planning expert at Quilter, said: “Just eight weeks after the announcement that the top rate of income tax would be abolished, Jeremy Hunt has pulled a quarter of a million more people into the top rate which will cost them each £620 on average.”
Someone earning £130,000 will pay an additional £243 a year in tax, which increases to £743 for those earning £140,000 a year. People earning £145,000 will see their tax bill rise by £993, according to Quilter.
Moore said: “With the UK government facing pressure on its finances following the pandemic and energy price guarantee, Hunt has cast aside Kwarteng’s theory that you can cut taxes to increase revenue and instead is seeking to fill the black hole by hitting the wealthy through a combination of tax increases and stealthy allowance freezes.
“However, these are often the people who can afford to plan their tax affairs and are likely to have more than one source of income, therefore it is likely to see an increase in the take up of tax advice.”
The government has also frozen income tax thresholds for a further two years until April 2028. Income tax thresholds were already frozen until 2026 under former Chancellor Rishi Sunak.
The “stealth tax” will see the number of people paying income tax for the first time rise, while others will be pulled into higher tax bands over the years as wages increase.
The freeze, alongside other tax rises, is forecast to raise the government around £35 billion a year by 2028, according to the Institute for Fiscal Studies.
Calculations show that if wage growth is on average 5% per year for the next five years but income tax thresholds remain frozen, someone earning £35,000 today will be £695 worse off in the 28/29 tax year and £2,016 poorer over the five year-period.
Similarly, someone earning £50,000 will be £3,403 worse off in the 28/29 tax year and £9,765 poorer in total.
Moore added: “These calculations illustrate the power of fiscal drag and how freezing income tax thresholds is a form of stealth tax. Ultimately, if thresholds remain frozen for a number of years, then people will end up paying considerably more tax.”
Steven Cameron, pensions director at Aegon, said: “While the freeze on thresholds for basic and higher rate income tax will create more tax take ‘by stealth’, there’s nothing stealthy about the cut in the additional rate threshold which rather than being frozen is being reduced from £150,000 to £125,140.
“This will cost anyone earning over £150,000 an extra £1,243 a year, in sharp contrast to the savings Kwasi Kwarteng’s mini-Budget would have granted by removing the additional rate entirely. But in current conditions, it’s not surprising that those who can afford to shoulder a greater part of the burden of tax increases are being asked to do so.”
One particularly striking element of the Chancellor’s plans, said Oliver Jones, asset allocation strategist, Rathbones, is the timing.
“The planned fiscal squeeze happens after 2024, rather than immediately. That’s the effect of freezing tax thresholds for longer and waiting to impose spending restraint (the government is largely sticking to existing departmental spending plans for the next two years).
He addd: “There may be an element of political calculation to this, with implementation of the toughest choices left until after the next election.
“But there’s economic logic to it too. Both the Bank of England and the independent fiscal watchdog forecast that the UK economy will contract in 2023. And uncertainty remains exceptionally high in the wake of the pandemic and the war in Ukraine. In these circumstances, a more gradual approach probably makes sense – aggressive front-loading would have risked compounding a deep recession. It does, though, mean that the Bank of England will still have to shoulder the task of reducing inflation, and it’s still likely to increase interest rates above 4%.”
