Record numbers of Britons are now paying the higher rate of income tax, with more than five million people caught in the 40 per cent tax bracket for the first time.
New figures from HM Revenue & Customs (HMRC) show 5.1 million people were paying the higher rate in the 2022-23 tax year.
This represents a 15.3 per cent increase, the equivalent of 680,000 more taxpayers, compared to the previous financial year.
This surge comes as a direct result of frozen tax thresholds introduced by the last Conservative Government, which have remained static since March 2021-22.
Higher-rate taxpayers now make up 15 per cent of all taxpayers in the UK and account for 35 per cent of the total amount raised by the Government from income tax.
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The Government’s fiscal drag policy is causing more Britons to pay the higher rate of income tax
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The milestone figure has sparked concerns that Chancellor Rachel Reeves might extend these threshold freezes in her upcoming mini-Budget on March 26.
The freeze on tax thresholds, known as “fiscal drag”, has been a key factor in pushing more earners into higher tax brackets.
This phenomenon takes place when tax thresholds are frozen at the same level over a period of time when wages or inflation, with workers and savers being pulled into higher brackets as a result.
An income tax rate of 40 per cent applies to earnings over £50,271. This threshold has been frozen at the 2021-22 level and will remain in place until April 2028.
Previously, most thresholds were due to rise in line with inflation. The freeze was introduced by the previous Conservative government under Rishi Sunak when he was chancellor.
It was initially meant to help plug gaps in the country’s finances after the Covid-19 pandemic. The policy was supposed to run until 2026 but was later extended by Jeremy Hunt to 2028.
When thresholds don’t move up with inflation, more people are pulled into higher bands as their salaries rise.
HMRC’s figures explicitly recognise that this “fiscal drag” is behind the latest surge in higher-rate taxpayers.
The number of people paying the additional tax rate of 45 per cent has also increased significantly.
HMRC figures show 600,000 people were paying this rate on earnings above £125,140 in 2022-23.
This represents a 9.5 per cent rise compared to the previous year. These additional-rate taxpayers made up nearly two per cent of all taxpayers.
Despite their relatively small numbers, they contributed 34 per cent of all income tax raised. The freeze in the personal allowance threshold has had a widespread impact too.
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Millions of more workers are losing more of their hard-earned cash to HMRC
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Income up to £12,570 is not taxed at all under this allowance. But the freeze resulted in 1.5 million more people paying income tax in 2022-23.
Higher and additional rate taxpayers combined, totalling 5.7 million individuals, contributed 68.7 per cent of the UK’s income tax revenue during this period.
Shaun Moore, tax and financial planning expert at Quilter, warned: “The impact of the Government’s fiscal drag policy has been laid bare in this morning’s personal income statistics from HMRC.”
He added that the increase in overall taxpayers came as “wages climbed while income tax thresholds remained stagnant”.