The number of higher-rate taxpayers has surpassed five million for the first time, pulling millions more people into paying more tax. HMRC’s latest figures reveal that 5.1 million individuals paid the higher 40% rate of tax in the 2022/23 tax year, marking a 15.3% increase or an additional 680,000 taxpayers compared to the previous year.
In contrast, there were only 4.2 million higher-rate taxpayers five years ago. The higher rate of 40% tax kicks in on earnings exceeding £50,271.
This threshold has been frozen since the 2021/22 tax year and will stay put until April 2028. Typically, most thresholds rise with inflation, but this freeze, implemented by the previous Conservative government, means more people are being pulled into a higher tax bracket as they earn more.
Consequently, if you receive a pay rise or switch to a better-paying job, you risk being pushed into a higher tax bracket.
This phenomenon is referred to as “fiscal drag” and it generates more revenue for the Treasury without necessitating changes to the tax rates. Economists predict that the total number of higher-rate taxpayers could reach nine million by 2028 and possibly hit ten million by the end of the decade, reports the Mirror.
In the fiscal year 2022/23, higher-rate taxpayers, who represented 15% of all taxpayers, were responsible for 35% of the total income tax revenue collected by the Government. The number of individuals paying the additional tax rate increased to 600,000 in 2022-23, which is a 9.5% hike from the previous year.
Taxpayers are subject to the additional 45% rate on earnings over £125,140. These additional-rate taxpayers constituted nearly 2% of all taxpayers and contributed to 34% of the income tax revenue.
At the same time, due to the personal allowance threshold being frozen – meaning that income up to £12,750 remains untaxed – an additional 1.5 million people were brought into the income tax bracket in 2022-23. Shaun Moore, a tax and financial planning expert at Quilter, commented: “The data indicates that higher and additional rate taxpayers, totalling 5.7 million individuals, contributed 68.7% of the UK’s income tax revenue during the period.”
He further noted: “In contrast, 28.2 million basic rate taxpayers and 0.6 million savers rate taxpayers account for the remaining share. This highlights the significant role higher earners play in overall tax receipts. With income tax thresholds frozen until 2028, this figure is expected to rise as more people’s salaries exceed the higher rate thresholds.”
Andy King, a financial planning expert at Evelyn Partners, has pointed out significant shifts in the UK taxation landscape: “This data reveals a marked increase in the number of taxpayers in the UK across the board, with more earners drawn into paying tax – possibly for the first time – at the basic rate, and many more being drawn into the upper tax bands.”
King goes on to explain that these changes are largely due to “fiscal drag,” noting, “This is of course due to the process of fiscal drag, 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 until the freeze is thawed, which will be 2028 at the earliest.”
He further highlights the specific impact on certain taxpayer groups: “What is remarkable is the extent to which basic-rate taxpayers are being drawn into the higher-rate tax band, where there was a 15.3% increase in the number of taxpayers to 5.1 million. Their total income tax liabilities also soared by 15.6%, and this is in part due to the tapering of the Personal Allowance remaining at £100,000.”
Finally, King delves into the behavioral influence of these tax thresholds: “That is another boundary that has remained unchanged and continues to create a step in the effective marginal tax rate to 60%, which many people seek to avoid by restricting earnings – either by avoiding extra work or a promotion, or by making tax-efficient pension contributions.”