Nearly 1.5 million more people will be forced to pay higher rate tax by 2027, making tax advice even more critical, Quilter said.
A freedom of information request by Quilter showed HM Revenue & Customs expects a further 1.13 million people to pay higher rate tax by the 2027/28 tax year, with 301,000 more people set to become additional rate taxpayers.
The higher rate of tax is levied on anyone with an income between £50,271 and £150,000 at a rate of 40% while the additional rate is taxed at 45% on income over £150,000.
Chancellor Jeremy Hunt froze the higher rate of tax in the Autumn Statement last year, extending the freeze previously announced in Spring 2021 under then Chancellor Rishi Sunak.
Rachael Griffin, tax and financial planning expert at Quilter, said the figures illustrate that the government is aware of the power of fiscal drag – when the income level at which taxes start to be collected and the amount of income that can be earned tax-free do not increase at the same rate as inflation or income growth.
Griffin said: “Over a million more people will be subject to higher rate tax due to wage inflation and many of those may not feel wealthier as their salaries have simply kept up with inflation. This means that in real terms their buying power remains much the same, yet their salaries are taxed much more. Freezing income tax bands is a form of stealth tax as you’ll end up paying considerably more tax during the time bands are frozen, which will be on top of higher energy and food costs.”
Griffin said the figures also highlight the growing need for tax-planning.
“The new tax-year presents no better time to plan for efficient use of allowances for the tax-year ahead.
“One option might be to make additional pension contributions via salary sacrifice, essentially lowering the taxable portion of salary and potentially reducing it under the higher rate of tax threshold,” added Griffin.
