More than half of London’s full-time employees will be paying higher rate 40% income tax on their salaries by the time of the next election, analysis by the Standard has revealed.
The Chancellor’s decision to freeze income tax thresholds for another three years out to 2031 will hit the capital hardest with thousands of middle earners dragged into a bracket originally designed only for highly paid employees such as City bankers and company directors.
The extended freeze set to be announced in the Budget today means 40% income tax will continue to kick in at £50,270 for at least another six years.
But latest ONS data shows that the median full-time employee in London earned £46,414 this year. The median means that exactly half of the capital’s 2.3 million full time employees earned more than that figure, and half less.
With earnings currently rising at an average of 4.8% a year, the median full time salary in London will crash into higher rate tax within two years. So by 2027 more than half of London full time employees will have to pay 40p in every extra pound they earn.
In many boroughs the higher rate moment will come even soon than that. According to the ONS the median full time salary in Hackney is £49,482, while in Lambeth it is £49,034. Both are just a whisker below the a 40% threshold likely to be passed next year.
Indeed across inner London as a whole the median full time employee salary stands at £49,366, less than £1,000 below the 40% tax trap.
The relatively high gross salaries paid in the capital – often as a result of weightings designed to compensate for a higher cost of living – means that London employees are far more vulnerable to what economists call fiscal drag.
This is the process by which workers are pulled into frozen higher tax bands as their salaries go up.
Across the UK as a whole the median salary for employees is £39,039 meaning it will be in the 2030s – after the next election - before it exceeds the higher rate threshold.
It means that London is shouldering an ever higher proportion of the national income tax bill year after year.
At the start of the century in the 2000/01 financial year London contributed £21.3 billion of income tax revenue to the Treasury out of a national total of £107.1 billion, or 19.9%.
By the 2022/23 financial year – the latest for which figures are available – this had risen to £66.2 billion out of a national total of £250.5 billion, or 26.4%.
That proportion is almost certain to have risen over the past two years and will rise again in the coming years – thanks to fiscal drag.
Including part-timers and the self employed there are 5.1 million workers in London paying income tax in the current financial year. Of those 3.4 million pay 20% basic rate, 1.3 million 40% higher rate and 342,000 the 45% additional rate for incomes over £125,140.
