The number of higher-rate taxpayers has exceeded five million for the first time, drawing millions more into the higher tax bracket. HMRC‘s latest data reveals that 5.1 million individuals paid the 40% higher rate in the 2022/23 tax year, marking a 15.3% increase – or 680,000 additional taxpayers – compared to the previous year.
In contrast, five years ago there were 4.2 million higher-rate taxpayers. The 40% tax rate applies to earnings above £50,271.
This threshold, which has been frozen since the 2021/22 tax year, will remain unchanged until April 2028. Typically, thresholds rise with inflation, but this freeze means more people are being pulled into the higher tax bracket as their earnings increase.
As a result, if you receive a pay rise or switch to a better-paying job, you could be pushed into a higher tax bracket. This phenomenon is known as “fiscal drag”, generating more revenue for the Treasury without needing changes to tax rates.
Economists predict that there could be nine million higher-rate taxpayers by 2028, and possibly ten million by the end of the decade, according to the Mirror. In the fiscal year 2022/23, a staggering 35% of total income tax revenue was provided by higher-rate taxpayers, who made up just 15% of all contributors.
Moreover, there has been a noteworthy increase of 9.5% in the number charging the additional tax rate of 45% on earnings above £125,140, with their numbers swelling to 600,000 that year. These top-tier taxpayers represented nearly 2% of the total taxpayers while contributing a mammoth 34% of the income tax tally.
Meanwhile, the move to freeze the personal allowance threshold resulted in an additional 1.5 million individuals being taxed in 2022/23 as the allowance held steady at £12,750 – the limit under which income remains untaxed, reports the Mirror. Tax and financial planning specialist Shaun Moore from Quilter shed light on the data: “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 also pointed out the disparity in contributions: “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 from Evelyn Partners has highlighted a significant surge in the number of UK taxpayers, stating: “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 further delves into the reasons behind these shifts, attributing it to “fiscal drag” and explaining, “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 also called attention to the effect on certain groups, noting: “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.”
Highlighting the impact on behaviour by current taxation limits, King points out: “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.”
