The share of adults in the UK paying higher rates of income tax has grown significantly in the last few decades, a new report by the Institute for Fiscal Studies (IFS) has highlighted.

In the 1991/92 tax year, just 3.5% of adults were paying the 40% higher rate of income tax, a figure that has now risen to 11% for 2022/23 and is set to climb to 14% by 2027/28.

Of this 14%, the IFS has estimated that 3.1% of adults will face marginal tax rates of either 45% or 60% – only slightly below the share who paid the 40% higher rate at the start of the 1990s.

This acceleration in the number of higher-rate taxpayers over the next five years is being driven by the Government’s freeze to income tax thresholds. The IFS stated that by its final year, in 2027/28, this freeze will represent the single most significant tax increase since Geoffrey Howe increased VAT to 15% in 1979.

As a result, while in the 1990s less than 6% of teachers and essentially no nurses paid higher-rate tax, income tax thresholds failing to keep up with average wages means that by 2027/28, more than one in eight nurses and one in four teachers are set to be higher-rate taxpayers.

The IFS also warned that as a result of the Government’s freeze, real household disposable income will be 1.4% lower by 2027/28 than would have been the case if the personal allowance and higher-rate threshold had been increased in line with inflation – wiping out around a third of the growth in disposable income that households would otherwise have seen over the period of the freeze.

“Governments often tend to rake in extra coffers from salaries rising faster than tax thresholds, but the current freeze imposed by the Treasury is fiscal drag on steroids,” commented head of investment analysis at AJ Bell, Laith Khalaf.

“IFS analysis shows that a high proportion of teachers and nurses will be paying higher rate tax by 2028, and that 3.1% of adults will face marginal tax rates of 45% or 60%. That’s before you throw in the weird and wacky tax rates of over 100% which arise as a result of income tax combined with thresholds for childcare. On top of which the Government is also slashing the tax-free allowance for dividends and capital gains tax.

“All of this adds up to an unholy cocktail of pressures on households in the midst of an inflationary crisis. Consumers now face a triple whammy of higher taxes, rising prices, and bigger mortgage payments. This all limits their ability to spend money, which has a knock-on effect on the economy at large, and is a significant contributing factor to flatlining growth.”

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