The colossal tax raid that explains why high earners say they don’t feel rich: SIMON LAMBERT

Would £440 extra a month make you feel richer? That’s a pretty specific figure to ask about, but it’s one that explains why those on double the average salary or more regularly say they aren’t rich.

Tempting as it may be to dismiss the chorus of high-earners complaining, it’s worth considering why they are moaning so much.

Some reader comments on our recent stories on six-figure earners saying earning £100,000 doesn’t make you wealthy, prompted me to head down the tax rabbit hole.

To paraphrase: A reader stated that while £100,000 was without doubt a big salary – the UK’s median full-time wage is currently £37,500 – it was only the modern-day equivalent of earning £40,000 when Tony Blair came to power in 1997.

My first thought on reading that was: ‘Fair point’. My second was: ‘Hang on, is that true?’

So, I jumped in the This is Money DeLorean, aka our historic inflation calculator, to check and it turns out that £100,000 today is the equivalent of £39,408 in 1997.

Curiosity piqued, I had soon tumbled into the online parallel universe where you find yourself absorbed by a House of Commons Library paper entitled Personal Tax Allowances & Reliefs 1997-98.

Reading this 14-page banger by Antony Seely illustrated two things: firstly, that life can get pretty wild at This is Money, and secondly, that fiscal drag has been absolutely colossal since I left school.

The 40% tax threshold should be £76,600

In 1997, the higher rate tax threshold was just £30,200. 

That sounds like a shockingly low figure to start paying 40 per cent tax above until you work out what the equivalent of earning that would be now.

Uprated for RPI inflation since 1997, the 40 per cent tax rate threshold would be £76,632 today.

Sadly, however, the higher rate tax threshold has woefully failed to keep pace with inflation and actually stands at just £50,270.

This represents both a radical redefinition of what it means to be a higher earner and a massive stealth tax raid.

To put this another way, a worker today on £76,632 is the equivalent of one just reaching the higher rate threshold as New Labour swept in.

But today’s worker pays 40 per cent tax above £50,270, so loses an extra 20 per cent on the £26,362 gap between those two figures.

This amounts to £5,272 a year extra in tax compared to what they would be paying if the tax system had dealt them a fairer hand.

This is a stark example of fiscal drag in action, as a principle once enshrined in the system to ensure tax bands remained the same in inflation-adjusted real terms was wholeheartedly binned.

Sadly, the magic of compounding works both ways, and while gains on gains can grow your wealth substantially, inflation on inflation can sap it drastically too. Over the long-term, the effect is dramatic.

That £5,272 a year in extra tax works out as £439 a month of post-tax earnings.

This is an extra amount in their pay packets that would almost certainly make even those on £75,000 a year feel considerably richer.

And yet they wouldn’t actually be any better off than their 1997 predecessors, they would just be level with them.

You can see why this bracket of people, including middle-class professionals, such as solicitors, senior teachers, doctors, engineers and managers, along with a chunk of high-earning tradespeople, feels aggrieved.

Many will have families they are supporting and those aren’t cheap.

To put the money these families are losing to tax in context, it could represent the monthly cost of a new car, a couple of decent holidays, a new bathroom or half a kitchen, or the difference between building a savings pot and raiding one.

Most will have lifestyles that look enviable on the surface but compared to their late 90s counterparts singing along in the new kitchen to Oasis and The Verve, they are notably poorer.

The six-figure earners paying 60% tax 

But what about the six-figure earners we started the column with, surely their grumbling can’t be justified?

They are undoubtedly better off, but have a point too.

The £100,000 personal allowance removal threshold was introduced in April 2010, if it had risen with inflation, it would be £181,000 now.

But 15 years later, this threshold at which the 60 per cent tax trap kicks in, is stuck at exactly the same level.

Someone earning £100,000 today is on the equivalent of £55,184 in 2010 and is arguably very different to the people Labour’s Alastair Darling was targeting when he brought in his financial crisis emergency policy.

The £150,000 additional rate tax band was also introduced in April 2010. The tax rate has since been cut from 50p to 45p, but the threshold was also slashed down to £125,140 by Jeremy Hunt.

Yet, if that original £150,000 threshold had risen with inflation it would stand at £271,819 today.

It’s hard to garner sympathy for high earners, but we should have weaned ourselves off this fiscal drag addiction a long time ago.

We wonder why this country struggles for economic growth, I’d suggest it is one of the reasons.