The latest HMRC data has revealed that the number of people being pulled into higher and additional rate tax brackets continues to soar as a result of the government’s frozen tax thresholds.
The data estimates that since thresholds were frozen in the 2021/22 tax year, 4.4 million more people will be dragged into paying income tax in the current tax year. There has also been a dramatic shift in the number of people paying higher rate tax, with almost 1.9 million more people expected to be dragged into the 40% tax bracket this tax year compared to 2021/22.
The impact of the additional rate tax threshold being lowered during a period of high wage growth means that for the first time, more than 1 million people will pay additional rate tax this year.
Rachael Griffin, tax and financial planning expert at Quilter, said: “This continued upward growth in higher and additional rate taxpayers comes as no real surprise given income tax thresholds are set to be frozen until 2028. The pandemic had a profound impact on the economy, and so too has the subsequent cost of living crisis, both of which caused a surge in wage growth due to a combination of factors including increased demand for certain jobs, supply chain disruptions, and inflationary pressures.
“Given the Office for Budget Responsibility initially projected there would be 6.7 million higher rate and 1.1 million additional rate taxpayers by 2027-28 as a result of frozen income tax thresholds, the fiscal drag impact has far surpassed any original expectations the government had and we will continue to see the government’s coffers be topped up exponentially as more and more people are pulled in.”
Frozen thresholds have also resulted in a sharp increase in the number of income tax-paying pensioners. According to HMRC, between 2023-24 and 2024-25, there was a 660,000 jump in people over pension age who were income tax payers, taking the total to 8.51 million.
Laura Suter, director of personal finance at AJ Bell, said: “The frozen tax bands combined with chunky increases in the state pension mean that more pensioners are becoming taxpayers for the first time. It’s been a key election topic, with the Tories pledging a ‘triple-lock plus’ to help pensioners and accusing Labour of failing to shield the state pension from income tax. Since tax bands were frozen in 2021 there will be 1.77 million more taxpayers over the state pension age, a 26% increase.
“As we head toward the General Election the Tories are pointing at Labour and insisting they will increase taxes if elected. But it is clear the Tories have also overseen a period in which more taxpayers are paying more tax too. From 2010 to the current tax year there have been huge increases in the number of taxpayers at all levels.”
Griffin said the figures paint a picture of a tax system in need of re-evaluation. She warned that as income tax thresholds remain frozen amidst higher wages and inflation only just returning to the Bank of England’s 2% target, the government’s original policy intentions will pile pressure on taxpayers.
“Crucially, neither of the main political parties has pledged to thaw the frozen tax thresholds. The next administration faces a critical decision of whether to recalibrate tax thresholds or risk perpetuating a system that risks stifling economic growth and unfairly targeting those struggling to keep up with living costs,” she added.
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