A Conservative Party MP has urged Prime Minister Rishi Sunak and Chancellor Jeremy Hunt to abolish the six-year “stealth” tax freeze which is dragging basic rate taxpayers into the “punitive” 40 per cent tax bracket.
Fiscal drag means freezes to tax thresholds will cost taxpayers up to £4,000 by 2027, according to research by interactive investor.
In an exclusive interview with GB News, Greg Smith, MP for Buckingham, said the threshold for the higher rate of tax – currently frozen at £50,271 until 2028 – should be raised to up to £75,000.
The Tory MP was contacted by a police sergeant in his constituency, who was shocked to find he now had to pay the 40 per cent tax rate.
Mr Smith told GB News: “If you think back, the concept of higher rate tax was meant to be something that was put on what we could loosely call the ‘well off’, ‘the rich’, ‘the wealthy in society’.
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Greg Smith, MP for Buckingham, urged the Chancellor to increase the higher rate tax threshold during an exclusive interview with GB News
“It was never meant for police sergeants, for band eight nurses, for teachers who have additional responsibilities.
“This fiscal drag we've seen, where the thresholds have been frozen, have quite literally dragged people who were never ever intended to pay higher rate tax into this quite punitive 40 pence in the pound rate.”
He added: “It's a matter of fairness. It's a matter of acknowledging in the tax system that higher rate tax, 40 pence in the pound or worse, should only really be levied on those that society at large does consider well off or wealthy.”
Asked where he thought the higher rate threshold should be, Mr Smith said: “If it had kept up with inflation, I believe it would be somewhere around £55,000 to £60,000.
“However, actually there'll still be a lot of people, such as public servants and people in well-paid but not extortionately well-paid jobs who would get caught up in that.”
He asked: “Where's the aspiration for someone to go from, say, earning £45,000, £46,000 or £47,000 to over that £50,000 mark? Because you're basically going to have it all taken off you again in taxation.
“To encourage aspiration, encourage growth, encourage people to push themselves that bit further, I'd like to see it somewhere around the £70,000 or £75,000 mark, I think.”
The MP argued that many of the workers being dragged into the 40 per cent band were “never intended” to pay that level of tax.
He said: “Where we've got this real perversity is people that were never intended to be in the high rate of tax are being dragged into 40 per cent income tax, the 40 pence in the pound higher rate.”
The personal allowance – the threshold at which point people start paying the basic 20 per cent rate of tax on their income – has also been frozen, at £12,570 until 2028.
It means people on a low income may now face having to pay tax as their income rises with inflation.
Addressing pensioners who are being caught in the tax net, Mr Smith said: “I think it's absurd that pensioners who've done the right thing, who put into a private pension, who saved hard throughout their working lives, suddenly find themselves being punished for it as they draw down their pension.
“This is the real-life effect of inflation coupled with fiscal drag. If you don't keep up with inflation, with the thresholds as a very minimum, people who were not expecting to pay tax, and arguably shouldn't be paying tax, are dragged into it.
“I have total sympathy with that pensioner that wrote into GB News. I have total sympathy with all pensioners out there who frankly have done the right thing all of their lives and now find themselves actually being double-taxed. Because they paid tax on it all the way through their working lives and now, they're being taxed on it again.”
Mr Smith has called on the Prime Minister and Chancellor to use the Autumn Statement next week to “move the tax thresholds with the times”.
He said: “We have seen wage inflation, we have seen overall inflation. And the fact that the higher rate tax threshold has been frozen for six years has dragged far more people into 40p in the £1 tax than was ever intended.
“I'm not talking about the people that everybody in society would look at and say, ‘They're super rich or wealthy. We're talking about people like police sergeants, band eight nurses, teachers that have additional responsibilities, many of our our trades.
“Nobody ever expected people with those jobs to be in high rate tax.
“We've got to, as a priority, shift those thresholds and relieve people doing those jobs of that high, high burden of taxation.”
With the freeze of income tax thresholds estimated to raise over £25billion a year in 2027/28, GB News asked Mr Smith how the Government would foot the cost of uprating the income tax thresholds.
He said: “This is an argument that I think we need to have as a country because time and time again, when you reduce a tax, particularly on something like income, it doesn't necessarily mean you get less money in."
Mr Smith claimed: “When George Osborne reduced the 50p [additional tax] rate to 45p, £3billion extra came into the Exchequer because one, you're taking away people's incentive to avoid tax.
“But more importantly than that, you're giving people that extra rocket boost to strive that bit harder to get on and to go for that promotion because they know it's actually going to be worth it, if that £2,000 pay rise, that £4,000 or £5,000 or £6000 pay rise means a real substantial amount of extra cash in their bank account every month, rather than seeing the state take the lion's share of it.”
Speaking in the House of Commons on Wednesday, Mr Smith asked the Prime Minister to agree “in principle that the concept of higher rate tax wasn’t meant to drag in police band eight nurses, teachers with additional responsibilities, and others, and that a priority for his Treasury ministers should be to return fairness to the tax thresholds”, urging him to make returning “fairness” to the tax thresholds a priority for Treasury ministers.
WATCH NOW: Greg Smith MP asks Rishi Sunak about higher rate tax threshold
Mr Sunak replied: “I agree with the Honourable Gentleman, and I am pleased that the vast majority of people will continue not to pay the higher rate. I share his ambition to cut taxes for working people.
“Right now, inflation is falling and we are sticking to our plan which is delivering a halving of it this year, because that is the most effective tax cut that we could have delivered for the British people this year, rather than making it worse as the party opposite would, borrowing money in a way that would be irresponsible and just drive up inflation and interest rates.
“But I want to reassure him that I absolutely share his ambition to cut taxes for working people, and as we stabilise the economy, that’s something that both the Chancellor and I are keen to deliver.”
The frozen income tax thresholds mean high earners with a £50,000 salary in 2022 are due to pay an extra £1,967 in tax by 2027, compared to if the threshold rose with inflation.
If these earners had two children, they would also lose £2,075 in Child Benefit by 2027 due to being caught in the High Income Child Benefit Charge, if their salary rose with inflation but the £50,000 tax threshold remained the same.
Meanwhile, middle earners with a £30,000 salary last year are set to pay £889 more in tax by 2027 if the thresholds didn’t rise with inflation.
Alice Guy, head of pensions and savings at interactive investor, said: “Fiscal drag is silent and ruthlessly efficient way of raising the tax burden over time.
“It works by freezing tax thresholds so that we pay tax on more and more of our income as our wages rise with inflation. It’s less obvious than raising tax rates, but potentially has an even bigger impact on taxpayers over time.
“Frozen tax thresholds affect all of us, not just higher earners, because the frozen personal allowance means even lower earners gradually pay tax on more of their income.”
Ms Guy told GB News: “Freezing tax thresholds is the ultimate stealth tax as not many people take much notice of tax thresholds.”