Extra 7.8m people will be dragged into higher tax bands by 2029, says OBR

Almost eight million extra people will be dragged into higher tax bands despite Rachel Reeves’s commitment to raise allowances in line with prices.

The Office for Budget Responsibility (OBR) said a six-year freeze in income tax thresholds introduced by the Chancellor’s predecessor Jeremy Hunt will leave families paying an extra £51bn a year in tax by the end of the decade.

The independent tax and spending watchdog said this will push the number of people paying tax on their incomes above 40 million for the first time.

Rising prices have left workers facing a stealth raid on their earnings because tax allowances and thresholds have been frozen rather than increased in line with the cost of living.

This has raised the tax take for the Treasury by billions of pounds as rising pay pushes more workers into paying income tax or into a higher tax bracket than would otherwise be the case.

So-called fiscal drag has boosted the Treasury’s coffers by tens of billions of pounds over the past few years following Vladimir Putin’s invasion of Ukraine.

The OBR said higher pay and prices in the near term meant revenues would be £5bn a year higher by the end of the decade compared with just six months ago.

The watchdog now believes 4.2 million people will start paying income tax as a result of the freeze that started in 2021, with three million more people pushed into paying the 40p rate and an extra 600,000 forced to pay the top rate of tax by 2027-28.

The total number of people pushed into higher rate tax brackets is now estimated at 7.8 million people, up from 7.1 million in the OBR’s March forecast.

Ms Reeves announced the biggest tax-raising Budget in history on Wednesday but chose not to include an extension to the freeze in tax thresholds in the £40bn raid because it would hit working people.

“Having considered this issue closely I have come to the conclusion that extending the threshold freeze would hurt working people. When it comes to choices on tax, this government chooses to protect working people every single time,” she said.

However, the OBR said revenues brought in by fiscal drag were increasing because of higher pay and prices. It added that Ms Reeves’s £25bn national insurance raid on employers more than wiped out Mr Hunt’s decision to cut NI for employees in the previous two fiscal statements.

The OBR said: “From 2027-28 onwards, there are now expected to be over four million extra taxpayers brought into tax as a result of these threshold freezes, meaning that the number of taxpayers is expected to surpass 40 million.

“Taken together, the net effect of changes to income tax and NICs over the last four years and at this event is to increase tax receipts by £51bn by 2029-30. The tax reductions from the NICs measures at Spring 2024 and Autumn 2023 are more than offset by the tax increases from changes to Employer NICs at this event.”