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The number of people in the UK paying the top rate of income tax is set to pass 1mn for the first time this year, as a prolonged freeze in thresholds and wage inflation boosts the state’s coffers.
The freeze on income tax thresholds means the number of people paying the 45 per cent levy on earnings has more than doubled in the past three years, from 520,000 in 2021-22, the year before thresholds began to be frozen.
According to figures published by HM Revenue & Customs on Thursday, the number of higher rate taxpayers — who pay tax at 40 per cent on earnings between £50,271 and £125,140 — is expected to rise to 6.31mn in 2024-25, up from 4.43mn 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 the tax take for the government”.
Since April 2022, the government has frozen several allowances and tax thresholds, rather than raising them in line with inflation, and plans to keep them unchanged until April 2028.
The move has increased tax receipts as higher pay tips more workers either into the tax system or on to higher rates, a phenomenon known as “fiscal drag”, which some critics have described as a stealth tax.
Labour has promised not to lift income tax or national insurance if it wins the general election next week while the Conservatives have pledged to abolish the main rate of self-employed national insurance in the next parliament.
But neither of the main parties have said they will reverse the personal income tax threshold freezes, which both hope will continue to expand the tax take and offset some of their manifesto spending pledges.
Tax receipts on earnings by the end of 2024-25 were on course to hit £272.6bn, an increase of £16.3bn on the previous year, Suter said.
Rachael Griffin, tax and financial planning expert at wealth management company Quilter, said the figures overshot forecasts from the Office for Budget Responsibility, the fiscal watchdog, of 1.1mn additional rate and 6.7mn higher-rate taxpayers by 2027-28.
“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,” she added.
Income tax starts to be levied on earnings above £12,570, and HMRC expects 37.4mn people to pay it in 2024-25.
The tax authority expects the number of people paying the additional rate of tax — levied on earnings above £125,140 — to hit 1.13mn in 2024-25, up from about 950,000 in 2023-24. The government lowered the additional rate threshold from £150,000 to £125,140 in April last year.
HMRC also anticipated more pensioners becoming taxpayers for the first time this year, because of a combination of frozen tax bands and increases in the value of the state pension.
In 2024-25, it said, 8.5mn people would have reached state pension age — now 66 and due to rise to 67 from 2026. By contrast, in 2021-22 6.7mn people of state pension age or over paid income tax.
Prime Minister Rishi Sunak has promised to unfreeze the personal allowance for pensioners at a cost of £2.4bn if he wins the election, meaning it would in future rise in line with the pensions “triple lock”.
David Brooks, head of policy at Broadstone, said the consultancy expected more pensioners “to be liable for income tax as the country’s demographic changes due to our ageing population and pace of increases to the state pension”.
“It is wholly appropriate that pensioners on higher incomes are subject to higher levels are tax — it is confusing why pensioners paying tax is necessarily seen as a bad thing,” he added.
In a sign of the impact of Bank of England interest rate rises, the HMRC data also showed that it expected to collect £10.4bn in tax on savings interest in 2024-25, up from £9.1bn in 2023-24 and well above the £1.4bn it took in 2021-22.