Tax  

Frozen allowances see almost twice number of higher rate taxpayers

Frozen allowances see almost twice number of higher rate taxpayers
 

The number of higher rate taxpayers is set to reach almost 5.5mn in 2022/23, according to data released by HM Revenue and Customs.

The figures, published today (June 30), showed the number of people paying the 40 per cent rate of income tax will rise to 5.5mn, an increase of 44 per cent compared with pre-Covid times of 2019/20. 

In 2019/2020, this figure stood at around 3.8mn.

In addition, the number of the very highest earners paying 45 per cent income tax will increase to 629,000, compared to 421,000 in 2019/2020 - a rise of 49.4 per cent. 

AJ Bell’s head of personal finance Laura Suter, said: “A destructive combination of rising wages and frozen tax bands means that there will be a near 50 per cent increase in the number of additional rate taxpayers, and a 44 per cent in the number of higher-rate taxpayers this tax year.

“While salaries are failing to keep pace with rocketing inflation, we are still seeing significant wage growth as the war for talent and rising living costs have led companies to push up pay packets. This coupled with frozen tax allowances means that more people are being pushed into higher tax brackets.”

Last year, chancellor Rishi Sunak announced a number of tax freezes, including the pensions lifetime allowance frozen at just over £1mn until April 2026.

In the 2021 Budget, Sunak said the LTA will stay at its current level of £1,073,100 until April 2026, instead of increasing in line with the consumer price index.

Inheritance tax thresholds will also be frozen until that date, as will annual capital gains tax allowances. 

Personal tax thresholds for both basic and higher rate taxpayers will rise next year as previously planned, but will then also be frozen until 2026.

Suter said: “If the personal allowance and higher rate thresholds weren’t frozen, we’d be expecting them to rise with inflation, though in reality the chancellor might well have baulked at increasing thresholds by 7 per cent or 8 per cent, even if he hadn’t chosen to freeze allowances.”

Meanwhile, the figures published this morning by HMRC revealed that the number of people paying higher rate income tax has risen by nearly two million since the last election.  

Consultancy firm LCP said the number of higher rate taxpayers is set to soar over the remainder of this parliament due to the frozen starting point for higher rate tax until 2025/26 at a time when wages and pensions are expected to increase rapidly.  

Estimates from LCP suggested that the total number of higher rate taxpayers could increase by more than 3mn over the whole of this parliament which would take the total to over 7mn in 2024/25.  

LCP partner Steve Webb, said: “Paying higher rate tax used to be reserved for the very wealthiest, but this has changed very dramatically in recent years. The starting point for higher rate tax has not kept pace with rising incomes, and the current five-year freeze on thresholds has turbo-charged this trend.