The number of people who pay the top rate of income tax in the UK, set at 45%, is expected to surpass 1 million for the first time this year.
Tax Threshold Freeze Leads to Surge in Higher Rate Taxpayers
The inability to raise tax thresholds in accordance with wages means more people are subject to the highest tax rates – a phenomenon known as fiscal drag.
Recent studies show the number of higher rate taxpayers – making between £50,271 and £125,140 — facing a 40% tax burden is projected to reach 6.3m this year. This represents a 42.6% increase compared to 2021-22.
While the number of additional rate taxpayers – making more than £125,140 — who are facing a 45% tax rate, is expected to hit 1.13 million. That would mark a 117% rise from 2021/22.
Laura Suter, director of personal finance at investment platform AJ Bell, stated that the fixed allowances had resulted in “a huge jump in the tax take for the government”.
She said that by the end of 2024-25 the total tax receipts on earnings are set to hit £272.6 billion, a rise of £16.3 billion on the previous year.
Nicholas Hyett, Investment Manager at Wealth Club, stated: “The combination of high inflation and frozen tax bands are dragging more and more people into paying income tax.
“You can see evidence of that across the board, but it’s particularly apparent at the top of the tax curve. In particular, the number of additional rate taxpayers has more than doubled in just three years, where workers have also been hit by a cut in the threshold at which the top rate of tax kicks in.”
He continued: “Many people who find themselves paying a higher rate of tax are no wealthier in real terms – with pay rises simply adjusting for a period of very high inflation, albeit with some distortion from the pandemic – but the government is taking a larger slice of their take home pay.
“These sorts of stealth tax rises are beloved of politicians because while there’s no headline grabbing tax rise on day one, over time they can add up to a huge increase in overall tax take.”
Looking forward, he said: “Unsurprisingly, neither of the major political parties looks likely to unfreeze the tax bands after the election. Expect the fiscal drag to continue in the years to come.”
Rising Income Tax Impact on Pensioners as Top Earners Dominate Contributions
The top 50% of income taxpayers were accountable for 90.8% of total income tax in 2021/2022, and are projected to represent 90.5% in 2024/25.
The top 1% of taxpayers were accountable for 30.7% of total income tax in 2021/22. This is anticipated to decrease to a 28.2% share in 2024/25 as the total amount of income tax collected increases.
HMRC expects that a larger number of pensioners will become first-time taxpayers this year because of a blend of frozen tax bands and rises in the state pension amount.
The number of individuals above the state pension age who are taxed on their total income from all sources is projected to go up from 6.7 million in 2021-22 to 8.5 million this year.