A million more will pay higher-rate tax

Around 4.6 million people currently pay tax at 40%, but that figure is set to increase dramatically. The Institute of Economic Affairs has calculated that even if the government raises the threshold to £50,000 by 2020, almost a million more people will be sucked into paying tax at the higher rate.

Millions more pay this tax

At the moment, the higher rate tax band kicks in when you earn £41,900, and applies to everything you make over this figure. In the past only a small minority of people paid tax at this level. However, so many years have now passed where the government failed to raise the threshold in line with earnings, that millions of people have now been dragged into paying the higher rate tax by inflation alone. Since 1979 the threshold has fallen by 10% in real terms, and 43% relative to wages.

As a result, the IEA says that in 1990 only one in 15 people paid higher rate tax. That increased to one in ten by 2010, and this year has hit a shocking one in six. Over this period 3 million people have been dragged into paying higher rate tax.
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Promises

At the Conservative Party conference David Cameron indicated that this sorry state of affairs would be addressed if he was elected, and that the tax threshold would rise in order to give people a fairer deal. He put a figure on it: saying that the threshold would rise to £50,000 a year by 2020. At the time he emphasised that by increasing the threshold, a million people who would otherwise pay 40% tax would continue to pay basic rate tax.

However, he failed to mention that this wasn't actually going to be a tax cut and that no one who is currently paying higher rate tax is going to find themselves paying basic rate tax again. All that will happen is that some of those who would have been dragged into the higher tax bracket will now avoid it. It still means that 900,000 basic rate taxpayers will be dragged into the higher tax bracket by 2020.

The IEA has said this situation cannot be tolerated, and has called for a wholesale change to a tax system it calls 'chaotic and inefficient'. It said: "The future for British taxpayers is bleak unless politicians agree to drastically reform the UK's tax code." "It is unacceptable to persist with a system that drags millions into paying a higher rate of income tax and erodes the aspirations of those on low pay to progress up the pay ladder."

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