TaxMar 8 2023

100,000 more people pushed into paying higher rate tax

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100,000 more people pushed into paying higher rate tax
The government has frozen the point at which the higher rate of tax is paid until the 2027/28 tax year. (Anna Nekrashevich/Pexels)
ByJane Matthews

The number of higher rate taxpayers in the UK increased by 100,000 to 4mn in the last tax year, according to figures released today (March 8) by HM Revenue and Customs. 

Experts said the figures come as no surprise given that wage growth has been accelerated in response to inflation and the rising cost of living, while at the same time tax thresholds have remained frozen.

The HMRC figures also showed that the number of additional rate taxpayers increased by 12,000 to 433,000.

Currently, the higher rate of tax of 40 per cent is paid on income between £50,271 and £150,000, while the additional rate of tax is paid on income over £150,000.

In the past, the government has increased the tax bands with inflation, but the point at which the higher rate of tax is paid was frozen until 2026 in 2021's Spring Statement by then chancellor Rishi Sunak.

In the 2022 Autumn Statement, chancellor Jeremy Hunt further extended the freeze on the higher rate of tax up to 2027/28.

Commenting on today’s statistics, tax and financial planning expert at Quilter, Rachael Griffin noted that the rate at which someone starts to pay the higher rate of tax has shifted minimally since 2019.

Griffin said this was “despite wage growth during that time being significant due to a range of factors including the pandemic”.

“Wage growth is still likely to accelerate with inflation often forcing employers to pay their employees more so they can cope with rising costs.” 

Earlier this year, a freedom of information request to HMRC submitted by Quilter, revealed that over 1mn people are forecast to be pulled into higher rate tax bands by 2027.

“The majority of those will become higher rate taxpayers and these people may not feel wealthier as their salaries have simply kept up with inflation,” Griffin said.

“This means that in real terms their buying power remains much the same, yet their salaries are taxed much more.”

Griffin explained that the reason for this is because of fiscal drag.

“Fiscal drag happens when the income level at which taxes start to be collected and the amount of income that can be earned tax-free do not increase at the same rate as inflation or income growth.

"This can cause a larger portion of a person's income to be subject to taxes and can also cause more people to fall into higher tax brackets ultimately meaning they pay more in tax,” Griffin said.