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Thousands more UK earners will be dragged into higher income tax bands this year, as the government’s policy of “fiscal drag” squeezes households to raise money for the cash-strapped public purse.
According to HM Revenue & Customs’ estimates published on Thursday, the number of additional rate taxpayers in the 2023-24 tax year will rise by 55 per cent 2022-23 to 862,000. The number of higher-rate taxpayers will increase by about 6 per cent to 5.6mn.
The surge is the result of inflation-boosted pay awards and the effects of Chancellor Jeremy Hunt’s decision in November to freeze income tax thresholds until 2028.
In measures designed to prop up public finances in the aftermath of the Covid pandemic and October’s “mini” Budget, he also lowered the threshold for additional rate taxpayers from £150,000 to £125,140 from April 2023.
“There’s every chance we could see a million people paying the highest rate of tax next year,” said Steve Webb, a former pensions minister and now a partner with LCP, the actuarial consultancy. “That’s quite a seismic change in the tax system.”
While frozen thresholds have delivered improved tax receipts for government, raising an additional £6.7bn year-on-year in April and May alone, they have contributed to the squeeze on households imposed by sustained high inflation and interest rates.
Some £4.6bn was withdrawn from banks and building societies in May, according to the Bank of England. Figures represented the seventh consecutive month of withdrawals, but were partially offset by £3.3bn in inflows into tax-efficient individual savings accounts (Isas).
Webb described government measures as a “stealth tax” and said it had compounded difficulties faced by mortgage holders whose rates had increased drastically since policies were announced last year. He said it was a “semi-invisible way” to raise taxes that had proven politically attractive.
The Institute for Fiscal Studies, a think-tank, reported last August that current plans would help the government lock in an additional £30bn in revenue each year, up from the £8bn expected when a freeze was introduced in 2021.
Ministers should return to setting thresholds in real terms to improve forward projections, according to Thomas Waters, an associate director at the IFS.
The Treasury said: “Our tax system is helping to restore the public finances in the fairest way possible, with those earning the most bearing the most burden.”
A widening of the tax base due to a freeze on the personal allowance means that the top 1 per cent of earners are expected to contribute a smaller proportion of the tax take, down to 28.5 per cent this year from 29.1 per cent in 2020-21, as the burden is shared further down the income distribution.
“Additional tax is a burden at any time, but will be even more so in the current economic circumstances,” said Ammo Kambo, a financial planner at Brewin Dolphin. He said individuals should consider contributing more towards their pension to reduce their tax bill.
The number of individuals over the age of 65 paying tax is also projected to increase by some 700,000 this year to 8.5mn, according to HMRC. Around two-thirds of all pensioners now pay tax on their income, up from half three years ago.
