HMRC has seen 2 million taxpayers pushed into higher brackets (Image: Getty)
An ongoing freeze on HMRC’s income tax bands has pushed almost over two million more people into paying higher tax bills, new figures have revealed.
The latest taxpayer stats issued by the OECD show the number of additional rate taxpayers (those earning £125,140 or more) increased by 324,000 in two years between 2022 and 2024, while the number of higher rate taxpayers (those earning £50,270 and up) increased by 654,000 in the same timeframe.
At the same time, the number of basic rate 20% taxpayers earning £12,570 or more has increased by 1.15 million.
David Little, a partner in financial planning at wealth management firm Evelyn Partners, called out ‘fiscal drag’ for increasing the UK’s tax burden on wages which he says is ‘sweeping millions into higher tax brackets’.
Although these figures cover the tax years under the Conservatives’ threshold freeze and Jeremy Hunt’s reduction of the top rate from £150,000, the brackets for income tax have since been frozen again by Chancellor Rachel Reeves, and won’t be moved again until 2031 at the earliest.
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Mr Little said: “This data reveals how the powerful tide of fiscal drag is increasing the UK tax burden by sweeping millions into higher tax brackets, and into paying tax for the first time.
“Both the number of taxpayers in each band and the amount of income tax being paid to the Treasury are surging every year – exactly as Chancellors past and present have intended. It’s worth remembering that this data pertains to a time when the Conservative government was still in charge and Jeremy Hunt was Chancellor of the Exchequer.
“Fiscal drag operates as inflationary pay rises pull more people across tax allowances and thresholds that have been frozen since April 2021 – a process that is still in full swing and will continue to increase the tax burden to 38.5 per cent of GDP by the 2030/31 tax year, according to Office for Budget Responsibility estimates.”
He added “By then the demography of the country’s taxpayers will have been reshaped in the space of a decade, with the OBR expecting a quarter of all taxpayers to be paying the higher and additional rates by 2030, compared to 15 per cent in 2021.
“In real terms, everyday middle earners will be higher rate taxpayers by 2030, as opposed to the situation a decade or two ago when this band was confined to individuals regarded as ‘high earners’. Anyone considered in real terms a ‘high earner’ will by 2030 be in or staring at the top rate of tax, a charge that used to be reserved for the very highest paid elite.”
To avoid the extra tax bills, workers should look at pension contributions.
He added: “The main option open to many is to increase pension contributions as, while those funds will be locked away until age 55 or 57, this means the earner keeps more of their gross income by taking advantage of tax relief at their top rate of income tax.
“Salary sacrifice pension schemes are particularly effective in this respect as not only do they offer additional relief from National Insurance (and possibly an extra boost from the employer’s NI saving), but also could prevent the saver stepping up into a higher tax bracket.
“Salary sacrifice schemes are due to be limited from April 2029, so those who can should think about taking advantage while the going is good.”
HMRC acknowledged the rise in higher rate taxpayers is “likely to be due to the unchanged higher rate threshold and increases in income, largely from employment, resulting in more taxpayers being brought into the higher rate of tax”.