Changes to the tax system in the spring will see around 750,000 more people enter the higher tax band, according to the Institute of Fiscal Studies (IFS).
In its annual Green Budget – to be published on Wednesday – the thinktank addresses new tax measures set for 5 April, when the threshold of the 40% rate will drop from £37,400 to £35,001.
This will mean approximately a quarter of a million taxpayers on annual earnings of £42,476 or more will be drawn into the higher band as the allowance for tax-free earnings increases by £1,000 to £7,475. At the same time, 500,000 low earners will drop out of the income tax system, the IFS says.
The organisation’s calculations show that the average household will be £200 a year worse off as a result of the scheduled changes in tax rates combined with cuts to benefits.
The richest tenth of taxpayers will lose an average of 3% extra from their net income, compared with an average 1% for the population as a whole.
Up to 175,000 individuals of working age, with an annual income of about £40,000, will face an increase in their effective marginal rate from just over 30% to more than 70%, as a consequence of the reduction in the income at which family element of tax credit starts to be withdrawn and a sharp increase in the rate at which it is withdrawn, claims the IFS.
Senior research economist James Browne remarked, ‘Further reductions in household income are inevitable as government policies aimed at helping to reduce borrowing… are introduced. The set of the changes coming in April is complex and the pattern of gains and losses reflects this.
‘We calculate that a further 850,000 would be brought into the higher rate bracket by 2014-15 if the government were to reach its ambition of a £10,000 allowance.’