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Changes to income tax have come into force today meaning the additional rate of tax has now been cut in the UK. This means people will pay a higher rate of 45 percent when they earn more than £125,140 per year, which was previously £150,000 a year.
The Government says about 629,000 people currently pay the additional rate of income tax, however, thousands more people will now be pushed into paying up to £1,000 more each year.
Frozen income tax allowances mean considerably more people will have to start paying higher-rate and additional-rate tax.
Almost 1.5 million more people will be dragged into higher tax bands by 2027-28, according to an FOI submitted to HMRC.
The tax authority estimates that 1,130,000 more people will pay higher-rate tax, while 301,000 more people will become additional-rate taxpayers.
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Although wage inflation is pushing workers’ salaries higher, it means a larger portion of people’s incomes will be taxed, and some will fall into higher tax brackets.
Rachael Griffin, tax and financial planning expert at Quilter, the wealth manager that submitted the FOI, said: “These figures illustrate HMRC is well aware of the power of fiscal drag and exactly how many people they expect to be dragged into paying more tax due to the frozen thresholds.
“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.”
The Treasury is already benefiting from the frozen tax allowances. Receipts from income tax and National Insurance payments for April to December 2022 reached £281.1billion – an increase of £34.3billion compared to the same period a year earlier.
For every £2 that someone earns over £100,000, they lose £1 of their Personal Allowance.
The threshold for losing the allowance completely is £125,140 and the threshold for paying additional rate tax at 45 percent is now the same.
The Government’s decision to freeze income tax thresholds means nearly three million low- and middle-income people in England, Wales and Northern Ireland will have to pay basic or higher-rate tax for the first time this year while existing taxpayers will also have to stump up more.
The Institute for Fiscal Studies (IFS) think tank issued new figures showing what this is likely to mean for people.
The freezing of income tax and National Insurance allowances and thresholds will cost most basic rate taxpayers £500 from April and most higher rate taxpayers £1,000.
Those who only move into tax or into a higher rate would face a smaller increase.
Traditionally tax brackets are adjusted to keep pace with inflation; however, they have been frozen in cash terms since April 2021.
This means that as incomes rise, more low earners are pulled into paying the 20 percent basic-rate income tax (which kicks in at £12,571) and those with earnings nearing £50,000 tip into the higher 40 percent rate (which kicks in at £50,271).
Paul Barham, Partner at Mazars told Express.co.uk: “Putting the thresholds on ice, and lowering the 45p tax band, is a double whammy and will raise billions for the treasury. Millions will be in the higher and additional rate tax bands in the coming years. And high earners will really feel the hit, with a higher proportion of their income subject to the 45 percent tax rate.
“Tax bills are only going in one direction for millions of people, and that is up. This makes tax planning even more critical. If salary sacrifice is an option through your employer, consider using it to reduce your taxable earnings or think about increasing your pension contributions.
“Benefits like a season ticket loan, company car, cycle to work scheme or claiming tax-free childcare can also be used cut your taxable earnings.”
