Successive Chancellors of the Exchequer have stealthily increased tax rates for hundreds of thousands of high earners by freezing, a think-tank study has revealed.
Economists say that failing to raise tax thresholds in line with the cost of living has hoisted rates for some taxpayers to as high as 60%.
Pension rules, inheritance tax thresholds and child benefit caps all contribute to high earners paying more tax than they should, while Chancellors have boasted fewer people are snared in the tax net.
The Institute of Fiscal Studies explained that in 2007, 319,000 taxpayers were earning £150,000 a year – and while the threshold has not changed in the intervening decade, the number of earners has risen by a third to 428,000.
During the same period, the number earning £100,000 or more a year has increased from 647,000 to 986,000 taxpayers.
Unfair on high earners
The IFS also points out that had these thresholds moved in line with inflation, they would stand at £180,000 and £120,000.
“These are just two examples of the impact of having thresholds in the tax system that do not rise with prices. More and more people get drawn into higher tax bands in a way which is neither planned nor transparent,” says the report Dragging People Into Higher Rates Of Tax
Researchers argue that failing to index the £50,000 threshold for starting to withdraw child benefit impacts even more people, creating a 65% marginal income tax rate on incomes between £50,000 and £60,000 for people with three children.
Stuart Adam, a senior research economist at the IFS, said: “Some might struggle to shed a tear for the plight of high earners with good pensions.
Pernicious incentives
“But no one’s interest is served by encouraging them to work less in order to keep their income below an arbitrary threshold. And as these thresholds are frozen while incomes rise, these pernicious incentives become relevant to an ever-wider group of people.”
IFS director Paul Johnson feels politicians should be more transparent over tax rates.
“By freezing the thresholds at which child benefit is withdrawn, the personal allowance is withdrawn and the top rate of income tax applies, recent governments have, rather stealthily, increased the tax rates on high earners and the number of people facing high marginal rates of tax,” he said.
“If government thinks there is a case for more high-income people to pay more tax, it should be upfront about that view.”
