500k extra people pulled into 45% tax bracket

Will Drysdale, Senior reporter, Business & Accountancy Daily [2023-25]- Croner-i

In the last two years the number of higher rate taxpayers has shot up by almost two million, with HMRC predicting more than 7m now earning over the 40% tax threshold.

Staggeringly, the number of additional taxpayers facing 45% tax rate has increased rapidly since 2022-23, with more than 1.2m of these now more than doubling since 2022-23 when there were 570,000.

Percentage wise this is an increase of 115.3%, with the population of additional rate taxpayers making up 3.1% of the total income of the UK tax paying population.

From 6 April 2023 the additional rate was reduced from £150,000 to £125,140 which will be a mitigating factor for the huge increase in taxpayers.

Andrew Wright, head of savings at Paragon Bank said: ‘Approximately 70% of the tax take for the 2025-26 tax year is forecast to come from additional rate taxpayers.

‘Saving into an ISA is the easiest way that consumers can limit their tax exposure as the tax-free wrapper protects the interest you earn. Savers have indeed responded, with one of the busiest ISA seasons on record in the run-up to the end of the previous tax year, but the bulk of savings still sits outside of the wrapper.’

The number of higher rate taxpayers has also increased in this time period, with 38.7% more people expecting to be paying the higher rate this tax year than in 2022-23 when there were 5.1m. Going forward to this tax year there is predicted to be 7.08m higher rate taxpayers who will pay 18.1% of the total tax take.

The other key reason for this is successive governments’ decisions to freeze the income tax thresholds since the Conservatives started this in April 2021.

Rachel Griffin, tax and financial planning expert at Quilter said: ‘The Conservative government’s decision to freeze income tax thresholds from 2021-22 has become one of the most punishing and wide-reaching stealth tax grabs in recent history.

‘Since the freeze began, 6.1 million more people are expected to be pulled into paying income tax, including nearly two million more pensioners above state pension age, who are projected to number 8.72 million.’

Labour has plans to defrost the tax thresholds in 2028, but with the chancellor scrabbling for ways to increase the coffer we may see this reversed at this year’s Budget.

Griffin added: ‘If thresholds do remain frozen, then many more people across the earning spectrum will continue to be dragged into higher tax brackets through no change in their real income.

‘It’s a politically difficult problem to unwind, but the longer it’s left, the more damaging and entrenched it becomes.’