The Rising Threat of Higher Taxes for Middle-Income Professionals
Tens of thousands of middle-income professionals, including school teachers, nurses, and junior civil servants, could soon find themselves paying a higher rate of income tax. This potential shift is being driven by the possibility that the current freeze on income tax thresholds might be extended beyond its original expiration date in 2028.
The previous government froze the basic, higher, and additional tax rates in 2022, meaning that as wages increase, more people are pushed into higher tax brackets without any adjustment to the thresholds. This phenomenon is often referred to as a "stealth tax" because it affects individuals who may not consider themselves wealthy but still end up paying more in taxes.
Economists have warned that if the freeze is extended to 2030, it could lead to a significant number of middle-earners being forced into the higher tax bracket. Currently, around seven million workers pay the 40% higher rate, compared to just three million in 2010. Experts predict this number could rise to ten million by the end of the decade if inflation continues to drive wage increases.
If the tax thresholds had continued to rise with inflation, they would now be £15,480 for the personal allowance and £62,080 for the higher-rate threshold. However, the freeze has prevented these adjustments, leading to an increasing number of individuals falling into higher tax brackets.
Chancellor Rachel Reeves initially decided against extending the freeze, citing concerns about the impact on working people. However, recent economic forecasts suggest that she may be forced to reconsider due to weaker growth and the inability to implement welfare cuts. Analysts predict a potential £42.1 billion shortfall in public finances, which could necessitate higher taxes.
For example, a teacher earning £45,350 outside of London could see their salary exceed the higher-rate threshold by 2029 if it rises by 3% annually. With median teacher pay at £49,084, many educators are likely to cross the threshold in the coming years. Similarly, civil service roles at senior executive officer levels, which currently earn between £45,000 and £50,000, could also be affected.
NHS employees in band 6 positions, such as charge nurses and midwives, earn up to £46,580 and may also be pushed into the higher tax bracket. These roles, while important, are considered relatively junior within the broader civil service structure.
Financial experts like Jason Hollands from Evelyn Partners warn that higher inflation and wage pressures will inevitably push more individuals into the higher tax bracket. He suggests that contributing more to pensions could help mitigate this risk, as contributions receive tax relief. However, there is speculation about potential changes to pension tax relief, which could affect this strategy.
Stefanie Tremain from Blick Rothenberg highlights that as salaries rise, more individuals will fall into the higher tax bracket. She also notes that other consequences, such as reduced eligibility for married couples' allowances, could arise. Couples where one spouse is a basic rate taxpayer and the other has unused personal allowance may no longer qualify for this benefit.
The Treasury has stated that the Office for Budget Responsibility (OBR) will provide updated forecasts alongside the Autumn Budget. They emphasize that economic growth remains the primary focus for strengthening public finances.
With the potential extension of the tax threshold freeze, middle-income professionals face a growing concern that their financial situation could change significantly in the coming years. As wages continue to rise, the need for careful tax planning becomes increasingly important.