Millions more workers have been dragged into higher-rate tax bands because of the freeze on income tax thresholds since 2021.
The number of higher-rate taxpayers has increased from 4.43million in the 2021/22 tax year, to a projected 7.7million in 2026/27, according to government figures published today.
For tax allowances and thresholds to maintain their real value, or affect a consistent proportion of the working population, they need to rise with inflation or wage growth.
If they do not increase with inflation, then the amount people can earn tax-free, or at lower rate tax bands, falls behind the rising cost of living.
Meanwhile, if the allowances and thresholds don’t rise with wages, then they start to target a different slice of the working population.
This process is known as fiscal drag, and as wages tend to rise over time, it means that more low earners are caught in the tax net and the number of taxpayers in higher rate bands increases.
Fiscal drag: Millions more workers have been pulled into paying a higher rate of tax
The freeze in income tax bands since 2021 means that more of people’s income is captured by the tax system, helping to boost the Treasury’s coffers.
In 2021/22, income tax raked in £226billion for the Treasury. For 2026/27, that is forecast to rise to £347billion – an extra £121billion.
‘The Treasury has become increasingly reliant on the revenues generated by frozen thresholds,’ said Shaun Moore, tax and financial planning expert at Quilter.
‘What began as a temporary measure has evolved into one of the most effective revenue-raising tools available to government, but the burden falls squarely on the shoulders of UK taxpayers.’
Over the last two years, more than one million people have been pushed into paying the higher rate tax at 40 per cent for every pound earned over £50,270.
They are now projected to make up nearly a fifth of the overall income tax-paying population in the current financial year.
Marianna Hunt, of Fidelity said: ‘Higher-rate taxpayers are no longer a small group of top earners.
‘Because of frozen tax thresholds, millions of workers bringing home what probably feels like a relatively normal income are now paying rates of tax that would once have been reserved for much higher earners.’
Meanwhile, the number of additional rate taxpayers has increased from half a million in 2021/22 to a projected 1.29million in the current financial year.
This follows a freeze in the band at £150,000 before it was cut to £125,140 in 2023/24, dragging more people into the highest tax rate.
And it’s not just higher earners being dragged into paying tax. The number of basic rate taxpayers is projected to rise to 31.4million, from 27.4million in 2021/22.
‘Almost eight million more people, or a fifth of all taxpayers, have been dragged into paying tax in the years since [2021],’ said Moore.
‘Much of this growth is occurring within the basic rate tax band… However, what were once considered tax rates for wealthier people are increasingly reaching a much broader group.’
By the end of the current tax year, almost a quarter of all taxpayers are expected to be over the state pension age.
This is in large part because of the frozen personal allowance at £12,570 coupled with a rising state pension due to the triple lock.
According to AJ Bell figures, if the higher-rate threshold had risen with inflation since 2021/22, the 40 per cent tax band would kick in at a salary level of £69,504.
Income tax thresholds were frozen by the previous Conservative government in 2021, when Rishi Sunak was Chancellor.
It was set to end in 2025/26, before being pushed back a year to 2026/27. When Labour came into power, now Chancellor Rachel Reeves extended the freeze to 2030/31.
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