Stealth tax is hitting our savings and investments as well as income, says SIMON LAMBERT

There comes a point at which stealth tax stops being stealthy.

By my reckoning we reached that on the supposed ‘stealth tax’ measure of freezing tax thresholds last autumn, when Jeremy Hunt faced a backlash his predecessors dodged.

Not everyone will have wised up to what the Government has been up to – and plans to continue to keep doing – but we have reached a tipping point where enough people have clocked their wages are being grabbed.

The trick that Jeremy Hunt and previous Tory Chancellors have been up to for years is failing to raise tax thresholds in line with inflation or wages.

Tax trick: By freezing the higher rate threshold many more are being pulled into 40% tax

Doing this pulls more people at the bottom into basic rate tax, has created a huge rise in the number of 40 per cent taxpayers, and until last April lumped more into the 45p bracket.

I say until last April, as it was at this point that stern schoolteacher Jeremy Hunt reversed naughty schoolboy Kwasi Kwarteng’s abolition of the 45p tax band and dragged the threshold for it down from £150,000 to £125,410.

A report into the effect of the stealth tax raid arrived from the Institute for Fiscal Studies this week, which has been a leading critic of Britain’s increasingly convoluted tax system and of Mr Hunt’s plan to freeze tax thresholds until 2028.

The think tank laid bare some startling figures.

It said that by the 2027/28 tax year, 8.9million Britons will be paying higher rate taxes compared to just 3.2million when the Labour government left office in 2010.

The IFS highlighted that the fiscal drag triggered by the higher rate tax threshold freeze – introduced in 2021 – is equivalent to adding 6p per pound to both the basic and higher rates of income tax.

There will be an astonishing 80 per cent more people paying higher-rate taxes by 2027 than there would be if the threshold hadn’t been frozen at £50,270.

If it rose by September’s inflation figure each year instead of being frozen in 2021, from next April the higher rate tax threshold should be £60,866.

This means that an earner on the cusp of 40 per cent tax in 2021, whose wages have just kept pace with inflation since – and so hasn’t got any richer in real terms – loses an extra £2,119 in the midst of a cost of living crisis.

The level at which people start paying income tax has also been frozen at £12,570 since 2021, which would be £15,225 from next April if it had similarly risen with inflation.

Altogether, the politically unaffiliated and always measured IFS reckons the freeze will amount to ‘a colossal £52billion tax increase’.

Arguably, this flies further under the radar than if the income tax rate had been raised but, as I said at the start of this column, many people have wised up and are angered by the raid on their living standards.

In our report, we outline how this tax raid will hit until 2027.

The higher rate of income tax applied to less than 2 million people in 1990/91, but the Institute of Fiscal Studies forecast that 8.9million will fall within that category by 2027/28

The real stealth tax trick is sneakier though because Britain’s warped tax system also includes places where your income tax threshold decides other things, or tax traps that can be fallen into that the freeze makes worse.

Savings tax is an example. Interest on savings up to £1,000 per year is covered by the personal savings allowance, but if you are a higher rate taxpayer that threshold drops to £500 and you will then lose 40 per cent of your interest.

Meanwhile, if you sell some investments and make a profit, or hold shares, funds or investment trusts that pay you a dividend, once you get dragged into the higher rate income tax band you will pay extra capital gains tax or dividend tax.

The freeze also exacerbates some of the other pitfalls in the tax system that create 60 per cent marginal tax rates (the rate you pay on the next pound earned).

The removal of child benefit for households where either parent earns above £50,000 means an effective marginal income tax rate of 51 per cent if they have one child, or 59 per cent if they have two children.

Meanwhile, the removal of the personal allowance above £100,000, at the rate of 50p for every extra £1 earned, bumps up the marginal income tax rate to 60 per cent.

Not only have these thresholds themselves been frozen since the unfair measures came in, but freezing the higher rate tax threshold manages to also make them worse.

The parent losing child benefit should theoretically not be losing so much to tax, while the earner above £100,000 should be paying 40 per cent tax on a narrower band.

These are just a few examples of the mess that Britain’s tax system is in. As I’ve said here many times before, it’s high time a Chancellor set to work fixing it instead of making it worse.