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Higher Earners Continue To Be Penalised By Income Tax Thresholds Not Moving With Inflation

Tax burden concept. Money balancing with tax on scales. Flat vector illustration

A report released by the Institute of Fiscal Studies (IFS) examined the impact of income tax thresholds over time. It discovered that the topmost limit has not moved since its introduction in 2008, despite the change in living costs over that time.

The year before it was announced, there were 319,000 UK taxpayers who earnt an income above its £150,000 threshold. In 2019 there are 428,000 taxpayers who fall into that category, an increase of 34%.

Earnings are higher, but so are living costs

Whilst the rise in earnings is largely driven by inflation as the cost of living increases, the income tax threshold does not reflect this. It gives a false reading of the system, making it look as though more people are earning higher sums.

In reality the earners at the lower end of that bracket don’t belong there if threshold was to be increased in line with inflation. The report suggests that were the income tax bands to be recalculated, the upper limit would increase from £150,000 to £180,000. What a gap!

The dangers of a frozen tax system

Any government would need funding for the UK to remain operational. Without the money raised through taxes and National Insurance contributions, free education and healthcare would suffer horribly.

In times of shortfall when taxes are increased, in some ways it does seem sensible that the higher earners bear the brunt of it. After all, it’s better than low income tax payers being forced into a downward spiral of reduced standard of living (which has a knock-on effect on health, which effects earning potential…).

But a system of taxation which is not transparent about its failure to reflect the domestic economy is unfair. And as Stuart Adam, Senior Research Economist for IFS, said, “nobody’s interests are served by encouraging [high earners] to work less in order to keep their income below an arbitrary threshold.” A workforce with less hope of progression is in danger of becoming apathetic.

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