Stay informed with free updates
Simply log in to the British tax myFT Digest – delivered straight to your inbox.
The number of people in the UK paying the highest rate of income tax will exceed 1 million for the first time this year. This is because a long-term freeze of the thresholds and wage inflation will fill the government coffers.
The freeze on income tax thresholds means the number of people paying the 45 per cent levy on income has more than doubled in the past three years, from 520,000 in 2021-2022, the year before the thresholds were frozen.
According to figures published by HM Revenue & Customs on Thursday, the number of higher rate taxpayers – who pay 40 per cent tax on income between £50,271 and £125,140 – is expected to rise to 6.31 million in 2024-25, up from 4 .43 million 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 burden for the government”.
Since April 2022, the government has frozen several allowances and tax thresholds, instead of increasing them in line with inflation, and plans to leave them unchanged until April 2028.
The move has boosted tax revenues as higher wages push more workers into the tax system or higher rates, a phenomenon known as “fiscal drag,” which some critics describe as a stealth tax.
Labor has pledged not to increase income tax and national insurance if they win next week’s general election, while the Conservatives have pledged to abolish the basic rate of national insurance for the self-employed in the next parliament.
But none of the main parties have said they will reverse the freeze on the income tax threshold. Both hope this will continue to expand tax revenues and offset some of their manifesto spending promises.
According to Suter, tax revenues on profits would reach £272.6 billion by the end of 2024-25, an increase of £16.3 billion on the previous year.
Rachael Griffin, a tax and financial planning expert at wealth manager Quilter, said the figures beat forecasts from the Office for Budget Responsibility, the tax watchdog, which had predicted 1.1 million top-rate taxpayers and 6.7 million higher-rate taxpayers would be taxed in 2027-28.
“The impact of the fiscal pressure has far exceeded all of the government’s original expectations and we will see the state coffers being replenished exponentially as more and more people get involved,” she added.
Income tax is charged on income above £12,570, and HMRC expects 37.4 million people to pay it in the period 2024-25.
The tax office expects the number of people paying the additional tax rate — levied on income above £125,140 — to reach 1.13 million in 2024-25, up from around 950,000 in 2023-24. The government lowered the threshold for the additional rate 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 increases in the value of the state pension.
By 2024-25, 8.5 million people would have reached state pension age – currently 66 and rising to 67 from 2026. By contrast, in 2021-22, 6.7 million people were under state pension age or paid too much income tax.
Prime Minister Rishi Sunak has promised to release the personal allowance for pensioners to the tune of £2.4 billion if he wins the election, meaning it will rise in the future in line with the pensions “triple lock”.
David Brooks, head of policy at Broadstone, said the consultancy expects more retirees “will become tax liable due to demographic changes in the country due to our aging population and the pace of state pension increases”.
“It is entirely right that retirees with higher incomes are subject to higher tax rates. It is confusing why paying taxes by retirees is necessarily seen as a bad thing,” he added.
Data from HMRC shows the Bank of England expects to collect £10.4bn in tax on savings interest in 2024-25. That’s up from £9.1bn in 2023-24 and well above the £1.4bn collected in 2021-22.