Nearly a million workers in London and the South-East are facing a tax “hammer blow” as more people are sucked into paying the higher rate of tax.
Instead of raising income tax thresholds in line with inflation, Jeremy Hunt — who will unveil his first Budget next Wednesday — has extended a freeze on them first introduced by Rishi Sunak when he was at the Treasury.
The move, dubbed a stealth raid on middle earners, is set to raise billions of pounds over the coming years as the Chancellor tries to repair Britain’s public finances.
The research by the House of Commons Library estimates 450,000 more people in London will be paying the higher 40 per cent rate of tax on annual earnings of £50,270 and over by 2028 than would have been the case if thresholds had continued to rise with inflation.
The analysis also found that another 500,000 workers in the South-East will be dragged into the 40 per cent rate as inflation fuels a rise in workers’ wages.
Private sector pay rose by 7.3 per cent in the three months between October and December 2022, according to the most recent data from the Office for National Statistics.
The freezes, which also include the 20p basic rate of income tax, are expected to raise an additional £26 billion a year relative to raising the thresholds in line with consumer price index inflation.
The data comes as Mr Hunt is facing pressure from some Tory MPs to cut taxes to boost economic growth as Britain faces a recession this year.
Figures from the ONS showed the UK economy narrowly avoided recession in the second half of last year but flatlined in the three months to the end of December.
The latest GDP figures for January are due to be released on Friday. Despite public borrowing being £30 billion lower than expected thanks in part to a boost in tax receipts, the Chancellor is resisting pressures to reduce personal and business taxes now, fearing it could fuel inflation.
However, he is expected to keep the cap on typical annual energy bills at £2,500 from April instead of lifting it to £3,000, after the Treasury asked energy firms to prepare for either possibility.
Mr Sunak first introduced the income tax threshold freeze in March 2021 up to 2025-26 but Mr Hunt went further in his autumn statement last November, extending the freeze to 2027-28.
He is not expected to make any changes to the policy when he delivers the Budget on Wednesday.
The threshold analysis, which was commissioned by the Liberal Democrats, also reveals how another 700,000 workers in London and the South-East will breach the £12,571 tax free personal allowance by 2028 meaning they will have to start paying tax at 20 per cent on their incomes.
Liberal Democrats Treasury spokeswoman Sarah Olney said: “This tax hike is a hammer blow to families across London and the South-East. It will be Britain’s hardworking middle who will feel the pinch after this latest tax raid.
“Next week the Chancellor must act and finally ease the pain on hardworking people who are struggling to keep up with a toxic cocktail of tax hikes and energy prices. Britain cannot afford another Liz Truss-style budget.”
But the Treasury said: “After borrowing £400 billion to support the economy during Covid and since Putin’s invasion of Ukraine, it’s vital we stick to our plan to halve inflation this year and reduce debt to promote long-term growth.
“We have increased the tax-free personal allowance by over 40 per cent in real terms since 2010, excluding two million of the lowest earners from paying income tax altogether.”
The Commons Library research is based on estimates from the OBR which predicts 2.6â million people will be brought into the higher rate across Britain.
The OBR forecasts 3.2 million will be dragged into paying the 20 per cent basic rate of tax. But London and the South-East is set to be hit much harder than the rest of the country with more workers there being brought into the 40 per cent rate than the South-West, North-West, East of England and East Midlands combined.
Separate figures, revealed recently in a Freedom of Information request by wealth manager Quilter, revealed a further 300,000 workers will be pulled into paying the Chancellor’s new 45 per cent top tax rate by 2028. Mr Hunt announced in his autumn statement in November that the threshold for the top rate would fall from £150,000 to £125,140 in April.
Reducing borrowing, along with tackling inflation and getting the economy growing again, are three of Mr Sunak’s five key pledges for his premiership.
Matthew Lesh, from the Institute for Economic Affairs, said the higher tax burden on people in the South-East could further erode the capital’s attractiveness to “top talent”.
“The freezing of the income tax thresholds is a gigantic tax rise by stealth,” Mr Lesh said. “It means hundreds of thousands of middle-income earners across London facing an ever-higher tax burden. While inflation devalues the real value of our earnings, the tax man is coming in to take a little extra.
“The rising tax burden is making many top-earners reconsider whether London is the right place to call home. The 70-year high tax burden risks slowing the UK’s economic recovery.”
