An estimated 17.9 million Britons will be dragged into paying the basic rate of income tax by 2027/28 as a result of the freeze on income tax thresholds, new figures have revealed.
A Freedom of Information request to HM Revenue & Customs by Quilter, shows that of the total 17.9 million, up to 11.6 million will be affected during the final three years of the freeze.
The analysis also laid bare the impact of frozen thresholds on pensioners, with 8.2 million of those individuals over the age of 60. The wealth manager said that those in receipt of pension income, including the state pension, will increasingly be forced to pay tax on their retirement income for the first time.
The freeze on income tax thresholds has not only exponentially increased the number of people paying income tax but has also led to more people being taxed at higher rates as their income grows, the data shows. By the 2027/28 tax year, an additional 12 million people will be higher rate taxpayers, and a further two million will pay the additional rate of income tax.
Rachael Griffin, tax and financial planning expert at Quilter, said: “Initially introduced in the 2021-22 tax year until 2025-26, the freeze was expected to bring 1.3 million more people into paying income tax and one million more into paying at the higher rate. Now, however, the extended freeze until 2027/28, combined with higher wages, will see almost 18 million people paying income tax and 12 million paying at the higher rate.
“As incomes rise, including state pension income, more people are being dragged into paying tax for the first time or into higher tax brackets, a phenomenon known as fiscal drag.
“Even without an explicit tax rise, the Government will continue to collect more from taxpayers each year by keeping thresholds static. What’s more, as the State Pension rises while the personal allowance remains stagnant, many pensioners will soon find themselves having to pay back a proportion of their state pension.”
Griffin added: “Strategic financial planning has never been more important. Some will be able to mitigate their tax burden with options such as salary sacrifice arrangements and increasing pension contributions, whereas retirees should explore how they are taking income to ensure they are not paying more tax than necessary.”
