TaxJun 30 2022

Frozen allowances see almost twice number of higher rate taxpayers

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Frozen allowances see almost twice number of higher rate taxpayers
Pexels/Nataliya Vaitkevich

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.  

“People who would not think of themselves as being particularly rich can now easily face an income tax rate of 40 per cent and around one in five of all taxpayers will soon be in the higher rate bracket.”

Source: LCP

The five-year picture

AJ Bell’s Suter said latest figures from the Office for National Statistics showed wage growth year-on-year was 6.8 per cent. 

Someone earning £47,500 last year who would have been a basic rate taxpayer but saw average wage growth would now have tipped into the higher-rate tax bracket, she explained.

Meanwhile someone who earned £140,500 last year and would have been in a higher rate tax bracket would now have seen their wages rise to above £150,000 and the additional rate tax bracket.

“The picture looks worse over the five-year period of the frozen tax bands,” she said. “As a result millions of people are going to get dragged into the higher tax bands. 

“Based on OBR forecasts, we calculate that the personal allowance would reach £15,300 in 2026/27 if uprated in line with consumer price index, but will only sit at £12,800 if frozen until 2025/26.

“Likewise, if uprated in line with the OBR inflation forecasts, the higher rate threshold would reach £61,200 in 2026/27, but as it is, with thresholds frozen for four years, we can expect it to sit at just £51,200.”

She explained that those who are just below the thresholds currently are likely to feel the sharpest burn, because if thresholds were rising with inflation, this would help them keep out of a higher tax bracket. 

“Based on OBR forecasts for average earnings, we estimate that anyone who is currently earning above £43,600 is now in danger of being dragged into the higher rate tax bracket by wage increases in the next five years,” she added. 

In the spring statement, chancellor Rishi Sunak announced that the basic rate of income tax would be cut from 20 pence to 19 pence in the pound by 2024.

sonia.rach@ft.com

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