The additional-rate band was set at £150,000 in April 2010, when about 236,000 people paid the 45% rate. But the latest figures from HMRC show that there are now almost 1,130,000 taxpayers paying the additional rate in the 2024/25 tax year.
The ‘mini Budget’ announced in September 2022 by then Chancellor Kwasi Kwarteng, under Prime Minister Liz Truss, included plans to abolish the 45% additional rate of income tax, but this measure was later scrapped.
Calculations by Hargreaves Lansdown show that if the additional rate threshold had risen with wage, it would now be £239,928. However, the additional-rate threshold was reduced to £125,140 from 6 April 2023 and frozen until April 2028.
The threshold cut made a significant difference – almost doubling the number of additional-rate income taxpayers since 2022/23 (from 587,000 to 1,130,000).
Being classed as an additional-rate taxpayer doesn’t just affect the tax on income – additional-rate taxpayers also lose their personal savings allowance and pay a higher rate of tax on savings and dividends.
How life insurance can benefit your health and wellbeing over the decades
Sponsored by Post Office
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The woes facing additional-rate taxpayers can sound like nice problems to have to someone on a lower income, but if you’re among the hundreds of thousands of people dragged into the 45p rate, there’s nothing nice about it.
“It’s bad enough losing such a big chunk of your earnings, but it also has a knock-on effect on all sorts of other taxes. Fortunately, there are some steps you can take to cut the amount of additional-rate tax you pay.”
Top tips for additional-rate taxpayers to pay less tax
Sacrifice salary into your pension
If your workplace runs a salary sacrifice scheme, you can agree to give up some salary in return for pension contributions. If you pay additional rate tax, then on your last £1 of earnings you’ll face income tax at 45% plus National Insurance at 2%, so you’ll take home 53p. If you sacrifice it into your pension instead, you’ll get the full £1. Some employers will pass on some of their National Insurance savings too.
Carry forward any unused pension contributions
You can carry forward any unused annual pensions allowance from the previous three tax years, and get tax relief at up to 45%. If you paid tax at a lower rate in previous years, the tax relief will be more rewarding in the current year.
You can only use allowances that take your contributions up to the level of your income this tax year.
If you will earn less in the future, consider deferring income
If there’s a time when you expect to be paying a lower rate of tax, consider whether you can take income then, rather than now. You can, for example, use fixed-term savings that pay interest annually, instead of easy access paying more frequently. This often makes sense just before retirement.
Shelter as many of your income-paying assets in ISAs as possible
Income tax rates are usually higher than capital gains tax (CGT) rates, so it’s worth prioritising sheltering those. If you hold income-paying assets outside an ISA, you can use the share exchange process (also known as Bed and ISA), to move them into one.
Consider your cash ISA
When you become an additional-rate taxpayer, you lose your personal savings allowance overnight and pay 45% on your interest, so you’re better off in a competitive cash ISA than the equivalent savings account.
An additional-rate taxpayer paying tax on their savings would need to make 8.9% interest to match the return on an ISA paying 5%.
Plan as a couple
If you’re married or in a civil partnership and your partner pays a lower rate of tax, you can transfer income-producing assets into their name, so you both take advantage of your ISAs and tax allowances, and then the rest is taxed at their marginal rate rather than yours.
Consider VCTs or EISs
Investing in a venture capital trust (VCT) or Enterprise Investment Scheme (EIS) offers tax benefits to encourage investment in smaller, early-stage companies.
But these aren’t right for everyone as they are very high risk, so they should only be considered as a small part of a large and diverse portfolio. However, if you use these schemes, you can get 30% income tax relief on the amount you invest – which will reduce your overall tax bill.
