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Extra 1.3m people to pay higher rate tax by 2014, says IFS

An extra 1.3 million people on ‘relatively modest salaries’ could be forced to pay tax at the higher rate of 40%, a leading think-tank has claimed.

Following analysis of the Chancellor’s Budget, the Institute for Fiscal Studies (IFS) said it predicts that the number of higher rate taxpayers could rise from 3.7 million in 2011 to 5 million by 2014.

In his Budget on 21 March, the Chancellor George Osborne announced that the tax-free personal allowance will rise to £9,205 in April 2013.

The move is expected to benefit those on lower incomes, with experts suggesting that an additional 675,000 people will be taken out of paying income tax.

However, the IFS predicts that more middle income earners will be dragged into the higher rate tax threshold as a result. That’s because the higher rate threshold – the level at which people start paying 40% tax on their income – will be reduced from £42,475 to £41,450 (including the personal allowance).

‘This is part of a long-term trend towards the encroachment of 40% income tax onto people earning above-average but relatively modest salaries,’ said IFS director Paul Johnson.

‘It would be useful to know if the Chancellor has a view as to what proportion of taxpayers should be paying at the higher rate.’

If you would like to discuss how the Budget announcements may affect you, please contact us.