New analysis also suggests more than 700,000 people are now caught by the effective 60 per cent tax rate on earnings over £100,000.
Millions more people are paying higher rates of income tax compared with the start of the century, according to new analysis of how the UK tax system has changed over the past 25 years.
A new briefing from the Institute of Economic Affairs (IEA) suggests an additional 5.5million people now face income tax rates of 40 per cent or higher compared with 2000.
It comes as frozen tax thresholds continue to pull more people into paying tax, or into higher tax bands, as their wages increase. The impact can also be seen in the latest tax receipts, with HM Revenue and Customs (HMRC) collecting £189.8billion in Income Tax, Capital Gains Tax and National Insurance between April and July this year.
That is £13.2billion more than during the same four-month period last year. Total HMRC tax and National Insurance receipts reached £322.7bn, up £19.1bn year-on-year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “The tax take continues to soar as fiscal drag draws more people into paying more tax and at higher rates.”
She warned that getting a pay rise, bonus or promotion could push someone into a higher tax band, potentially affecting tax-free allowances and some benefits as well as the rate of tax they pay.
Latest HMRC projections show there will be 7.7m higher-rate Income Tax payers across the UK in the 2026/27 financial year – an increase of 33.8 per cent from 5.76m in 2023/24.
A further 1.29m people are projected to be additional-rate taxpayers, up 44.4 per cent from 893,000 three years earlier. Overall, HMRC expects the number of Income Tax payers to rise from 36.7m to 40.8m over the same period.
The ’60 per cent tax trap’
The IEA analysis also highlights the growing number of people affected by the withdrawal of the tax-free Personal Allowance once their income reaches £100,000.
It estimates more than 700,000 people are now affected, compared with fewer than 150,000 when the measure was introduced.
The standard Personal Allowance is currently £12,570, but people with adjusted net income above £100,000 gradually lose it.
For every £2 of adjusted net income above £100,000, £1 of the Personal Allowance is withdrawn. Someone with an income of £125,140 or more therefore receives no standard Personal Allowance.
This creates what is commonly known as the ’60 per cent tax trap’ for taxpayers in England, Wales and Northern Ireland.
For someone paying the 40 per cent higher rate, an additional £100 of income in this band incurs £40 of Income Tax. However, it also removes £50 of their Personal Allowance, making another £50 of income taxable and resulting in a further £20 tax charge.
This produces an effective marginal Income Tax rate of 60 per cent on income between £100,000 and £125,140.
The position is different in Scotland because separate Scottish Income Tax rates and bands apply to earnings, pensions and most other taxable income.
However, the Personal Allowance and the rule withdrawing £1 for every £2 of adjusted net income above £100,000 apply across the UK. Scotland’s higher rate is currently 42 per cent, with an advanced rate of 45 per cent and top rate of 48 per cent.
More taxpayers being pulled into higher bands
The IEA briefing, written by independent policy adviser Tom Clougherty, examined changes to Britain’s tax system since 2000 and their potential effect on economic growth.
It found the proportion of tax revenue coming from personal income taxes increased from 44.5 per cent in 2000 to 51 per cent in 2024.
At the same time, the proportion generated by consumption taxes, including VAT and excise duties, fell from 28 per cent to 22.5 per cent.
Clougherty argues that the shift towards taxing personal income, along with increases in taxes on investment, has made the UK’s tax system more damaging to economic growth.
The IEA research also points to the increasing complexity of the tax system, citing Institute of Chartered Accountants in England and Wales research showing the volume of UK tax legislation has increased from around 7,250 pages to more than 23,500.
Clougherty said: “The tax system didn’t cause Britain’s growth slowdown, but it has made bouncing back much harder than it needed to be.”
He said tax policy had increasingly prioritised political considerations over economic ones and warned that the situation could worsen during the 2020s and 2030s.
HMRC’s latest figures show the growing tax take extends beyond personal taxes. Inheritance Tax receipts reached £3.2 billion between April and July, £100m higher than during the same period last year.
However, the latest projections underline the scale of the increase in the Income Tax population in particular, with 40.8 million people expected to pay Income Tax in 2026/27 – around 4.1m more than just three years earlier.
