How £50,000 became the worst salary to earn

Labour’s manifesto promised to protect “working people”. Who exactly it meant by that was left undefined.

But the aspirational middle classes could be forgiven for thinking they must have been missed off the Chancellor’s list.

Well-qualified and ambitious workers, from electrical engineers and IT professionals to vets and paramedics, might expect to be on track for a well-paid, prosperous life.

But these middle-class stalwarts now find themselves being hit from all sides as Rachel Reeves extends the freeze on income tax thresholds and eyes up pension salary sacrifice schemes.

The tax burden is rising to a record high, exceeding even the level Britain required after the Second World War to pay down the debts it incurred by defeating Nazi Germany.

Workers on £50,000 who would expect to feel successful are instead facing an extraordinary squeeze.

To take a typical example, a marketing manager in the Midlands earning an average annual salary of £53,703 may have felt affluent in 2005 – but 20 years on, they have become part of Britain’s squeezed and underappreciated middle.

Here are the ways they have lost serious spending power in two decades and face more punishment in the years ahead.

Income tax raid

Reeves is adamant she has kept to her manifesto pledge not to raise income tax – which will confuse those who note she is raising £12.7bn from the levy.

By extending the long freeze on thresholds, the Chancellor is prolonging the stealth raid on workers’ incomes. In total, the nine-year hold under Tories and Labour will rake in £66bn for the Treasury.

The result of the latest extension is an extra £220 annual bill for basic rate taxpayers by 2030-31, according to the Institute for Fiscal Studies, rising to £600 for those on the 40pc rate. This blow drops to £390 per year for those earning more than £125,140 as they have already lost their tax-free allowance.

It also drags close to one million more workers into paying the 40pc rate of tax.

That is just the latest hit after years of extra taxes.

Twenty years ago, the 40pc rate was a tax for top earners. Only 11.5pc of taxpayers paid it.

Now more than 18pc are stung by the levy. That will rise to more than one fifth by the end of the decade. Add in the high earners paying the 45pc rate and around one quarter of taxpayers are being hit by rates far above the 20pc standard level.

Back in 2005, a person earning £50,000 per year paid around £12,200 in income tax. Now someone earning the same amount pays just under £7,500. But that neglects inflation: £50,000 is worth much less now than it was in 2005.

If that worker had only inflationary pay increases each year, so their salary went no further in the shops, they would be paid just over £89,000 now. Today that salary comes with an income tax bill of more than £23,000.

That comes before National Insurance, which had been cut for employees but risen for employers.

Living standards

Those calculations are hardly unusually stingy – wages in many cases have struggled to keep pace with inflation.

The Resolution Foundation warned that Labour risked presiding over a slump in living standards, with real household disposable income forecast to grow more slowly over this parliament than any other on record, except the last one.

The Left-leaning think tank said: “Unfortunately, the possibility of more tough choices is very real ... The flipside of the miserable productivity which made the headlines yesterday is continuing stagnation in living standards.”

Real household disposable income is forecast to grow just 0.5pc by the end of this parliament – significantly lower than the 1.8pc growth recorded between 2001 and 2005.

Worryingly for hard-working employees across the country, the long squeeze on pay also shows no signs of abating. By 2030, workers’ real terms hourly pay – adjusted for inflation – will still be 0.5pc below its 2009-10 level.

David Miles, an Office for Budget Responsibility official, said the growth in household incomes is “disappointingly low” and warned that “it reflects partly the productivity judgment and partly the tax take”.

The Resolution Foundation warned that living standards would continue to stagnate as productivity remains weak.

Spending slowdown

Alongside a squeeze on real wages, tax raids by stealth and a series of economic shocks have knocked the household finances of middle income earners across the country.

In recent years, soaring food prices and household bills have caused the nation’s squeezed middle to pare back spending.

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Food prices have more than doubled since 2005, according to the Office for National Statistics.

Electricity bills are up almost four-fold.

As the cost of essentials rises, many white collar workers have swapped dining out at restaurants for eating in and cut back on high street shopping.

Britain’s middle class have been “scarred” by elevated levels of inflation and cost of living pressures.

Speaking last month, Catherine Mann, a member of the Bank of England Monetary Policy Committee, said: “Consumers who have experienced difficult economic times become more pessimistic about their personal finances and continue to spend less for many more years, so we have scarring in terms of consumer behaviour.”

Housing bust

Finding a home to buy with that depressed income is tougher too.

Low interest rates bailed out borrowers in the years after the financial crisis and pandemic – but that era is over now, leaving stretched would-be first time buyers straining to cover higher monthly repayments.

First time buyers’ incomes have risen by 67pc in cash terms since 2005, according to lending data from UK Finance.

But the price of the homes they buy has more than doubled, from under £135,000 on average to more than £275,000.

It means the amount they have to borrow has jumped by 91pc on average, while the amount they need to save in the form of a deposit has more than doubled to almost £60,000.

The result is that would-be homeowners take longer to buy their first property: the typical age has risen from 31.6 years old to 33.3.

Even after extending the length of mortgages from 25 years to more than 31 on average, monthly repayments take up 21.8pc of buyers’ incomes. That is higher than it was in 2005 and is up from 2020’s Covid-era low of 16.5pc when interest rates were at rock bottom.

Then comes tax. The average first time buyer currently pays no stamp duty, thanks to a break for first-timers which relieves them of the loathed transaction tax if they buy a home worth less than £300,000.

By contrast, the typical cost in 2005 was £1,346. That is where the good news ends.

Any buyer who is not making their first property transaction pays tax if their home costs more than £125,000. That means an average bill of £6,818 now, almost four times the £1,792 paid 20 years ago.

The numbers are far worse in the capital. A typical buyer in London – where homes cost just shy of £600,000 on UK Finance numbers – pays more than £19,900, far above the £8,000 which would have been owed in 2005.

After that, owners have the pleasure of paying council tax.

The levy on the average Band D property in England has risen by more than £1,000 per year – or 88pc – over the same period, from £1,214 to almost £2,300 per year.

Pensions ransacked

As they face pressure from a freeze on tax thresholds and rising mortgage rates, squeezed paramedics and electrical engineers will be searching for ways to save for the future. Yet, even this has come under fire as part of the Chancellor’s tax raid.

Two decades ago, around 24pc of private sector workers were signed up to gold-plated defined benefit pension schemes. However, these have now been largely phased out, with just 12pc of private sector employees on such a scheme in 2020.

Now, the overwhelming majority of people working in the private sector have less generous defined contribution pensions. Middle-income workers who diligently save into these are faced with a raid on contributions through pension salary sacrifice schemes.

As part of the measures announced on Wednesday, National Insurance exemptions on salary sacrifice schemes will be capped at £2,000 from 2029.

The change is a blow for prudent middle earners who are longing for a comfortable retirement.

Sir Steve Webb, a former pension minister and now a partner at consultancy Lane Clark and Peacock, said that in order to avoid paying National Insurance contributions on employee contributions, businesses may seek to shift all pension contributions to the employer side.

He said: “If the employer basically tries to gradually shift towards paying all of the pension themselves, the way they may fund that is by depressing the next three years worth of pay rises.”

Lacklustre wage growth for Britain’s squeezed middle marks another challenging hurdle for them to overcome.

Savings raided

It is not just pensions. Anyone saving for a rainy day long before their retirement is also getting wallopped.

In the era of falling taxes, the Conservatives introduced a savings allowance, letting those with cash in the bank keep more of their interest, even outside an Isa.

From 2016-17, basic rate income tax payers could earn £1,000 of interest before paying the 20pc rate. Higher rate taxpayers could get £500 before their 40pc tax took a slice of interest.

That allowance has already been steadily eroded by inflation. The initial £1,000 threshold has lost more than one quarter of its value to price rises.

That might not have mattered much if interest rates had stayed at record lows. In 2016, a typical fixed interest account for a saver locking their money away earned just 1.2pc.

That meant a higher rate taxpayer could hold more than £40,000 before earning more than £500 of interest in a year.

Now, with average rates for a new account at 3.8pc, they would breach the threshold with a rather less impressive £13,250 in the bank.

Now Reeves has not only kept the thresholds frozen again. She has also ramped up the income tax paid on that interest, taking the charge on basic rate payers to 22pc and the higher rate to 42pc.

Child benefit

Middle-class parents had their child benefit clawed back by George Osborne, who means-tested what had been a universal benefit. In 2012 he announced a new High Income Child Benefit Charge, under which any family with one parent earning more than £50,000 would lose at least some of their benefit, with the whole lot being lost at £60,000 of income.

This new threshold was frozen for years. If it had risen with inflation, the threshold would have risen to almost £70,000 by 2024.

As a result, from 2024-25, the benefit was clawed back for those earning between £60,000 and £80,000.

That threshold is frozen once more, so is being eroded again by inflation.

It means those seeking to do well and earn more are punished by relatively high marginal tax rates as their benefit – likely the only one they receive – is withdrawn, even as their taxes go to fund the ballooning welfare bill. That includes Universal Credit, where the two child cap is now being lifted.

Student loans

A growing number of young middle income earners are also grappling with swathes of student loan repayments.

University fees rose from £3,375 to £9,000 in 2012. The sharp increase led to a significant rise in borrowing for young people with aspirations of a professional career.

The ballooning figures that graduates have borrowed meant that the debts of young professionals have changed significantly.

In 2007, a university leaver in England graduated with an average £10,500 in student debt. By 2017 this had more than tripled to £32,330.

Young professionals who graduated between 2012 and 2023 were dealt another blow on Wednesday when the Chancellor launched a stealth tax on those with plan two student loans.

The changes will mean that repayment thresholds – the income level at which graduates begin paying back the loan costs of their education – will be frozen at £29,385 for three years from April 2027.

From the start of working life to the hoped-for retirement after, Britain’s middle classes are being squeezed at every turn, to pay for the ballooning benefits bill under Reeves’s plans.

It is quite the inversion of the “cradle to grave” care Labour’s welfare state once sought to offer.

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