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The number of people in the UK paying the highest rate of income tax is set to exceed 1m for the first time this year as a long-term freeze on thresholds and wage inflation boosts the coffers.
The freeze on income tax thresholds means the number of people paying 45 per cent tax on earnings has more than doubled in the past three years, from 520,000 in 2021-22, the year before the thresholds began to freeze.
The number of higher-rate taxpayers – who pay 40 per cent tax on earnings between £50,271 and £125,140 – is expected to rise to 6.31 million in 2024-25, according to figures published by HM Revenue & Customs on Thursday. and that from 4.43. mn people in 2021-22.
Laura Suter, director of personal finance at investment platform AJ Bell, said the frozen allowances had led to a “huge jump in tax revenue for the government”.
From April 2022, the government froze several allowances and tax thresholds, rather than increasing them in line with inflation, and plans to leave them unchanged until April 2028.
The move raised tax revenue because higher wages tipped more workers either into the tax system or at higher rates, a phenomenon known as the “fiscal drag,” which some critics have described as a stealth tax.
Labor has promised not to raise income tax or national insurance if it wins next week’s general election, while the Conservatives have pledged to scrap the main rate of national insurance for the self-employed in the next parliament.
But neither major party has said it will lift the freeze on the personal income tax threshold, which both hope will continue to expand tax collections and offset some of their spending announcements.
Income tax receipts were expected to reach £272.6 billion by the end of 2024-25, an increase of £16.3 billion on the previous year, Suter said.
Rachael Griffin, a tax and financial planning expert at wealth management firm Quilter, said the figures beat estimates by the Office for Budget Responsibility, the fiscal watchdog, of 1.1 million additional rates and 6.7 million higher rate taxpayers by of the year 2027-28.
“The impact of the fiscal brake has far exceeded any initial expectations the government had and we will continue to see the government’s coffers increase exponentially as more and more people are drawn in,” she added.
Income tax starts to be collected on earnings above £12,570 and HMRC expects 37.4 million people to pay it in 2024-25.
The Inland Revenue expects the number of people paying the additional rate of tax – imposed on earnings above £125,140 – to reach 1.13 million in 2024-25, up from 950,000 in 2023-24. The government lowered the additional rate threshold from £150,000 to £125,140 in April last year.
HMRC also expected more pensioners to become first-time taxpayers this year due to a combination of frozen tax bands and an increase in the value of the State Pension.
In 2024-25, it said, 8.5 million people would reach state pension age – now 66 and due to rise to 67 from 2026. By contrast, in 2021-22 6.7 million people would be of state pension age or have overpaid tax on income.
Prime Minister Rishi Sunak has promised to free up the £2.4 billion personal allowance for pensioners if he wins the election, meaning it would increase in future in line with the “triple lock” of pensions.
David Brooks, head of policy at Broadstone, said the consultancy expected more pensioners “will be required to pay income tax given the country’s demographic changes as a result of an aging population and the pace of State Pension increases”.
“It is entirely appropriate that pensioners with higher incomes should be subject to higher levels of tax – it is confusing why pensioners paying tax is necessarily seen as a bad thing,” he added.
In a sign of the impact of the Bank of England’s interest rate hike, HMRC figures also showed it expects to collect £10.4bn in tax on savings interest in 2024-25, up from £9.1bn in 2023-24 and significantly exceeds In 2021-22 it took £1.4bn.