As tax rate band thresholds are changing, understanding the impact on high rate taxpayers and the economy is crucial. Join us as we look back and explore the changing landscape of income tax rates and what you can do.
If we cast our minds back to the early 1990s, John Major was Prime Minister and his successor as Chancellor, Norman Lamont, ran a distinctly different income tax strategy from the current incumbents of 10 and 11 Downing Street. Recent research by the Institute for Fiscal Studies (IFS) sheds light on the notable disparities between their approaches.
In 1991/92, basic rate income tax – then at 25% – was the top rate of tax paid by 96.5% of UK adults. The remaining select 3.5% paid higher rate tax (at 40%, as it is now outside Scotland). Up until the end of the 2000s, the starting point for higher rate tax generally followed inflation. However, in that period earnings outpaced prices, with the result that there was a steady rise in the numbers dragged into higher rate tax.
Matters worsened in the 2010s, with both freezes in the higher rate threshold and the introduction of additional rate tax on incomes over £150,000. The freezes stopped after 2015/16, only to reappear in the 2021 Budget. The Chancellor at the time, Rishi Sunak, fixed the higher rate threshold (again outside Scotland) at £50,270 through to 5 April 2026. At the time inflation was not projected to rise to the dizzy heights of 2% until 2025, meaning the impact of the freeze was expected to be limited.
In March 2023, Mr Sunak’s next but two successor as Chancellor, Jeremy Hunt, announced:
The IFS used data from the Office for Budget Responsibility (OBR) to calculate the impact of the Sunak and Hunt freezes combined with inflation at a level which was almost inconceivable just over two years ago. By April 2028, 14% of all adults and about one in five of all taxpayers will face a marginal rate of tax of 40% or more. The graph below shows the unhappy trend. In terms of tax increases, the IFS calculates that the threshold freezes will represent the single most significant tax increase since the rate of VAT was raised from 8% to 15% in 1979.
That only one number has changed – the additional rate threshold – makes the size of this tax increase difficult to believe…until you remember inflation. In effect, the Treasury has delegated tax policy to the soaring Consumer Prices Index (CPI).
If you pay tax at more than basic rate already, or are likely to in the next five years, there are a range of factors to discuss with your financial planner:
As tax year end approaches, there is still time to take action that can have an impact on your 2023/24 tax bill.
If you would like to arrange a call with one of our financial planners, please contact us here.
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