Middle-income earners are increasingly paying tax rates originally designed for the wealthy, new figures have show.
A decade of stealth tax raids has hammered middle-class Britons, effectively lowering the threshold at which workers are considered high earners.
Analysis by the Taxpayers’ Alliance shows how frozen income tax thresholds are forcing ordinary workers to pay “eye-watering” tax rates.
The higher-rate threshold, which currently kicks in at £50,270, has fallen dramatically relative to average earnings since 2010.
This fiscal drag means millions more taxpayers are being forced into higher brackets as inflation pushes up wages.
In 2010, the 40 per cent higher-rate threshold stood at £43,875, which was 83 per cent higher than average earnings.
Today, workers only need to earn 37.6 per cent more than the average wage to be taxed at the higher rate.
This figure is expected to fall further to just 28.3 per cent by 2027-28, according to the Taxpayers’ Alliance analysis.
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The 45 per cent additional rate threshold has also declined significantly relative to earnings. In 2010, it was 6.2 times average earnings, but has now fallen to 3.4 times, partly due to the threshold being cut from £150,000 to £125,140 in April 2023.
Income tax thresholds were frozen in 2021 under the Conservative government, who later extended the freeze until 2027-28 in their 2022 Budget.
Rachel Reeves opted against unfreezing the threshold in her first Budget as Chancellor. Known as fiscal drag, this policy means millions more taxpayers will be forced into higher brackets as inflation pushes up wages.
The Chancellor has refused to rule out further freezes in the upcoming Spring Statement on March 26.
Extending the freeze by a single year would add £4,100 to the tax bill of a worker earning £75,500, according to analysis by The Telegraph. This would raise £15bn for the Treasury.
Darwin Friend, head of research at the TaxPayers’ Alliance, said: “Our tax system has gone from being progressive to punishing, with even relatively modest earners now paying eye-watering tax rates.
“While those on low wages have seen frozen thresholds draining their incomes, the damage done by the higher and additional-rate freezes must not be ignored given their role in disincentivising work.”
He added: “Rachel Reeves needs to bring forward plans to unfreeze thresholds if she wants to have a chance of delivering the growth she claims to seek.”
The Office for Budget Responsibility (OBR) predicts that seven million people will pay higher-rate tax in 2025-26.
This represents 2.5 million more taxpayers than if income tax thresholds had never been frozen.
The watchdog forecasts that 3.5 million workers will start paying income tax in the coming tax year because of the freeze.
An additional 400,000 workers are expected to breach the additional-rate threshold. The cost of stealth taxes will exceed £4,000 for high-earners, with the burden increasing each year as the freeze continues.
Middle-class workers are being increasingly squeezed by these tax policies.
Middle-class workers are being increasingly squeezed by these tax policies
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Marco Malagoni, of investment management firm Waverton, warned that frozen thresholds meant more people risked being dragged into the “60 per cent tax trap”.
This affects anyone earning between £100,000 and £125,140, who faces an effective 60 per cent income tax rate on each additional pound earned due to the tapered loss of the personal allowance.
“The middle classes are absolutely being squeezed more and being taxed as if they were rich,” Malagoni said.
He added: “Fiscal drag is something people don’t see but it’s a very effective way of raising revenue.”
