The Government’s failure to increase the threshold at which taxpayers pay the higher rate of income tax in line with wage inflation has dragged 700,000 people into the 40% tax band in just five years.

Figures released by HM Revenue & Customs reveal that, while most people’s attention has been focused on inheritance tax and stamp duty, income tax has also become a major stealth tax.

Over 20% more taxpayers are now paying the higher rate of income tax than five years ago but in contrast the number of basic rate taxpayers has risen by just 5.4%.

The dramatic rise in the number of higher rate taxpayers cannot be accounted for solely by the growing number of multimillionaires within the UK. This stealth tax is undoubtedly affecting those who earn relatively modest salaries, including many public sector workers. It is not just a problem for the south-east.

The number of higher rate taxpayers has grown fastest in Northern Ireland, by 34% in five years, and by 33.8% in the north-east, so it cannot be argued that the increase has been fuelled by the rapid growth of the City in recent years.

The impact of the government’s policy over tax thresholds has received very little attention, but like inheritance tax, it seems content to allow those on quite modest salaries and with limited purchasing power to be hit by tax levels that were designed to target the rich.

Fiscal drag is netting the government an increasing amount of money every year as it fails to align income tax bands to pay increases, and inheritance tax and stamp duty to house price inflation.

It will net the Treasury almost £493m in income tax alone this year, leaving the majority of higher rate taxpayers an average of £705.84 worse off.

For workers the position is exacerbated by the impact of NIC changes where the upper earnings band has only increased by 14.5% in the same period, while the rate charged has increased by 2.8% thereon, plus earnings above that level are now charged at 1% whereas before they were not charged at all.

The government needs to address the problem of fiscal drag and to wean itself off its reliance on taxing by stealth. If it were to raise the higher rate tax band by 5.1%
to £36,364.60 this would put it in line with wage inflation over the last five years, creating a much fairer system for taxpayer who have enjoyed fairly moderate pay increases over the same period.

Roy Maugham is a tax partner at UHY Hacker Young